Abstract
In recent years, the issue of financial behaviour and the impact of investors’ sentiments on their decision making have become such a popular issue. The sentiments of financial activists affect the market price of financial assets and particularly stocks, and therefore it is included in the new pricing models of capital assets. In this article, we seek the effect of investors’ sentiments on the dynamics of the Iranian stock market (TSE). To do this, among the companies accepted in the stock market we select 120, considering the research criteria and screening method, we examined TSE specifics throughout 2010-2018 using regression analysis and causality test. Our results show that firstly investors’ sentiments have a direct effect on the stock returns and there is a bilateral relationship between them. Secondly, inflation has the opposite effect and economic growth has a direct and positive effect on the relationship between investor sentiment and stock returns. Finally, government spending has no significant effect on the relationship between investor sentiment and stock returns.
Highlights
In recent years, Eugene Fama’s Efficient-market hypothesis has been seriously criticized and this has led to a new approach to financial economics
Our results show that firstly investors’ sentiments have a direct effect on the stock returns and there is a bilateral relationship between them
Government spending has no significant effect on the relationship between investor sentiment and stock returns
Summary
Eugene Fama’s Efficient-market hypothesis has been seriously criticized and this has led to a new approach to financial economics. Several studies have documented that the classical theory in financial economics does not consider investor sentiment as a key factor to address the stock price (Thorbecke, 1997; Ehrmann & Fratzscher, 2004; Maio, 2014; Kurov, 2010). There are studies that show the behavior of participants is not entirely rational and is unpredictable and accompanied by emotions (Kunming, 2010; Thaler, 1991) and there are shreds of evidence that investor’s sentiment and emotions act as a systematic factor in stock prices (Baker & Wurgler, 2006; Stambaugh, Yu, & Yuan, 2012; Shen, Yu, & Zhao, 2017). The existing literature shows that if there is an arbitrage constraint, an increase in optimism when emotions are on the rise will cause the market to be overestimated for a long period, and stock prices will distort its reasonable discounted value of the projected cash flows.
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