In this paper an attempt has been made to develop an investor sentiment Index for India and also evaluate its relationship with market performance. Constructing an Investor Sentiment Index based on critical economic and market related variables and finding Investor sentiment Index and market returns exhibit bilateral causality thus implying that both impact each other. To stud this Vector Auto Regression (VAR) Model is used. Findings have strong implications for various market players such as investment analysts, portfolio managers and fund managers who gauge market sentiment to develop trading strategies. The findings are also pertinent for market regulators who are involved in framing policies for investor education and protection.
