I tested whether newspaper sentiment predicts stock returns in a frontier market. Five years of data, 494 stocks, one clear answer.

Wanted to share some findings from an econometric analysis I ran on the Pakistan Stock Exchange, since frontier market research rarely makes it to this sub. The local financial press consistently frames PSX movements as sentiment-driven, attributing rallies to "optimism" and selloffs to "cautious investor sentiment." I wanted to test whether that narrative holds up empirically. **Dataset:** 494 PSX-listed equities, 253 trading weeks, February 2021 to December 2025. Returns computed as market-cap weighted averages. Sentiment derived from Dawn newspaper headlines using the Loughran-McDonald financial lexicon. **What the analysis found:** * OLS across seven model specifications, contemporaneous through four-week lags with AR(1,2) controls, returns a maximum R-squared of 0.0179. Sentiment explains 1.79% of return variance. * Granger causality tests at lags 1 through 8 return a minimum p-value of 0.64. No predictive signal in either direction. * Event studies around three major political shocks, including the May 9 2023 civil unrest, show the market generated positive cumulative abnormal returns in the aftermath of each. * Rolling 12-week correlation oscillates between +0.80 and -0.75 with no persistent direction, consistent with a shared macro driver rather than a causal relationship. The VAR confirms it. These are two independent series for all practical econometric purposes. Happy to discuss methodology or share the code for anyone interested.