The Effect of Investor Sentiment on the Formation of Bubbles in the Stock Market

Document Type : Original Article

Authors

1 Assistant Prof, Department of Financial Management and Insurance, Shahid Beheshti University, Tehran, Iran.

2 Master Student in Financial Management, Shahid Beheshti University, Tehran, Iran.

Abstract

The main purpose of this study is to investigate the effects of investor sentiment on bubble formation in the stock market. This study aims to find a significant relationship between investors' sentiments and the creation and explosion of the bubble in the Tehran stock exchange. For this purpose, daily index data is used as well as investor sentiment index for the 2009 - 2019 period. By using Dicky – Fuller test, we identify bubbles in the Tehran stock market and calculate the indicator of investor sentiment. Afterwards, we study the relationship between investor sentiment and bubble formation by using Logistic regression.
 According to the research findings, the hypothesis of the influence of investor's feelings in the capital market on the formation of the financial bubble is rejected.Also according to the results of logistic regression and probit regression, The probability value of the variable EMSI (Equity Market Sentiment Index) at conventional statistical levels is meaningless. Further, the author observes that, Investor's sentiment have no effect on the formation of a bubble in the Stock market.

Keywords

References

  1. Asadi, G. H., Hamidi Zadeh, M. R., & Soltani, A. (2006). A survey of stock price bubbles in Tehran stock exchange on the basis of size and type of industries. Empirical Studies in Financial Accounting Quarterly, 4(14), 39-71. (In Persian)
  2. Baharmoghaddam, M., & Jokar, H. (2018). The Effect of Moderating Audit Quality on Investor Sentiment in Stock Pricing. Empirical Studies in Financial Accounting, 14(57), 123-146. (In Persian)
  3. Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross‐section of stock returns. The journal of Finance, 61(4), 1645-1680.
  4. Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of economic perspectives, 21(2), 129-152.
  5. Balcilar, M., R. Gupta, C. Jooste & M.E. Wohar. (2016). Periodically Collapsing Bubbles in the South African Stock Market. University of Pretoria, Working paper, No. 201624
  6. Bandopadhyaya, A., & Jones, A. L. (2006). Measuring investor sentiment in equity markets. Journal of Asset Management, 7(3), 208-215.
  7. Barberis, N. A. Shleifer, and R. Vishny. (1998) “A Model of Investor Sentiment.” Journal of Financial Economics,49, 307–343.
  8. Bormann, S. K. (2013). Sentiment indices on financial markets: What do they measure?(No. 2013-58). Economics Discussion Papers.
  9. Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and the near-term stock market. Journal of empirical finance, 11(1), 1-27.
  10. Caraiani, P., & Cǎlin, A. C. (2020). The impact of monetary policy shocks on stock market bubbles: International evidence. Finance Research Letters, 34, 101268.
  11. Chang, T., Aye, G. C., & Gupta, R. (2014). Testing for multiple bubbles in the BRICS stock markets. University of Pretoria Department of Economics Working Paper Series, 7.
  12. Davoudi, P., Bastanzad, H. (2020). Monetary policy and financial stability in Iran (DSGE approach). Quarterly Journal of Quantitative Economics, 17(2), 43-87. (In Persian)
  13. Elton, E. J., Gruber, M. J., & Busse, J. A. (1998). Do investors care about sentiment?. The Journal of Business, 71(4), 477-500.
  14. Fallah Shams, M. F., & Zare, A. (2013). A study on the factors effective in the formation of price bubbles in Tehran stock exchange. Journal of Securities Exchange, 21, 73-91. (In Persian)
  15. Froot, K. A., & Obstfeld, M. (1991). Intrinsic bubbles: The case of stock prices (National Bureau o1 Economic Research). Forthcoming in American Economic Review.
  16. Fu, J., Wu, X., Liu, Y., & Chen, R. (2021). Firm-specific investor sentiment and stock price crash risk. Finance Research Letters, 38, 101442..
  17. Grossman, S. J., & Stiglitz, J. E. (1980). On the Impossibility of Informationally EfficientMarkets.TheAmericanEconomicReview,70(3),393–408.
  18. Johansen, A., & Sornette, D. (1998). Stock market crashes are outliers. The European Physical Journal B-Condensed Matter and Complex Systems, 1(2), 141-143.
  19. Kheiry, M., Esmaeilpour Moghadam, H., & Dehbashi, V. (2017). Investigation the sudden volatility of stock value of the Tehran stock exchange relying on preferences of investors and quality of accounting information. Management Accounting, 10(35), 57-66. (In Persian)
  20. LeRoy, S. F., & Porter, R. D. (1981). The present-value relation: Tests based on implied variance bounds. Econometrica:Journal of the Econometric Society,555-574.
  21. Leung, C. (2004). Macroeconomics and housing: a review of the literature. Journal of Housing Economics, 13(4), 249-267.
  22. Markowitz, H. (1952). " Portfolio Selection".The Journal of Finance7(1):77-91.
  23. Waez, M., & Torki, L. (2007). Price bubble and capital market in Iran, University of Isfahan Research Journal. 31(3), 195-207 (In Persian)
  24. Pan, W. F. (2020). Does Investor Sentiment Drive Stock Market Bubbles? Beware of Excessive Optimism!. Journal of Behavioral Finance, 21(1), 27-41.
  25. Persaud, A. (1996). Investors’ changing appetite for risk. JP Morgan Securities Ltd., Global FX Research.
  26. Peterson, R. L. (2016). Trading on sentiment: The power of minds over markets. John Wiley & Sons.
  27. Phillips, P. C., SHI, S. P., & Yu, J. (2013). Testing for Multiple Bubbles 1: Historical Episodes of Exuberance and Collapse in the S&P 500... Research Collection School Of Economics.
  28. Phillips, P. C., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International economic review, 56(4), 1043-1078.
  29. Phillips, P. C., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values?. International economic review, 52(1), 201-226.
  30. Reinhart, C. M., & Rogoff, K. S. (2009). This time is different. princeton university press.
  31. salehabadi, a., & dalirian, h. (2010). testing the existence of price bubble in tehran stock exchange. journal of securities exchange, 3(9), 61-75.(In Persian)
  32. Hosseini Nasab, S.E., Naseri, A., & Godari, A. (2006). Study of price bubble in Tehran Stock Exchange during recent years (2004-2005). Ministry of Science, Research and Technology - Tarbiat Modares University (In Persian)
  33. Shiller, R. J.( 1981) Do Stock Prices Move Too Much To Be Justified Subsequent Changes in Dividends? American Economic Review 421-436.
  34. Shleifer, A., & Summers, L. H. (1990). The noise trader approach to finance. Journal of Economic perspectives, 4(2), 19-33.
  35. Sorntte, D., & Woodard, R. (2010). Financial bubbles, real estate bubbles, derivative bubbles, and the financial and economic crisis. In Econophysics approaches to large-scale business data and financial crisis (pp. 101-148).
  36. Williams, J. B. (1938). The theory of investment value (No. HG4521 W48).
  37. Yahyazadehfar, M., & Taghinezhad Omran, V., & Alipour, S. (2009). An Investigation of Rational Stock Price Bubble in Tehran Stock Exchange. Nameh-ye-mofid, 15(1 (72 Economics)), 49-68. (In Persian)
  38. Yukalov, V. I., Yukalova, E. P., & Sornette, D. (2015). Dynamical system theory of periodically collapsing bubbles. The European Physical Journal B, 88(7), 1-14.
  39. Zhang, C. (2008). Defining, modeling, and measuring investor sentiment. University of California, Berkeley, Department of Economics.
  40. Zare, M., Nilchi, M., Fareed, D. (2019). Comparative Evaluation of Markowitz Approach with a New Hybrid Method to Create an Optimal Portfolio Using Deep DNN Learning Method and Gravitational Search Algorithm.Journal of Financial Management Perspective, 9(28), 165-188
Financial Management Perspective
Volume 11, Issue 35
November 2021
Pages 91-118

Files

Share

How to cite

Statistics