Ciência e Natura ISSN: 0100-8307 [email protected] Universidade Federal de Santa Maria Brasil Fayyazi, Hadi; Goshtasbi Maharlouei, Rasoul Relationship between Investors Sentiment Index with First and Second Market Indexes in Tehran Stock Exchange (TSE) Ciência e Natura, vol. 37, núm. 4, 2015, pp. 16-24 Universidade Federal de Santa Maria Santa Maria, Brasil Available in: http://www.redalyc.org/articulo.oa?id=467547644003 How to cite Complete issue Scientific Information System More information about this article Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Journal's homepage in redalyc.org Non-profit academic project, developed under the open access initiative 16 Artigo original DOI: http://dx.doi.org/105902/2179460X19424 Ciência e Natura, Santa Maria, v. 37 n. 3 esp. 2015, p. 16−24 Revista do Centro de Ciências Naturais e Exatas – UFSM ISSN impressa: 0100-8307 ISSN on-line: 2179-460X Relationship between Investors Sentiment Index with First and Second Market Indexes in Tehran Stock Exchange (TSE) Hadi Fayyazi1*, Rasoul Goshtasbi Maharlouei2 1M. A. of Finance, Science and Research Branch, Islamic Azad University, Iran. 2 M. A. of Finance and lecturer, department of Accounting and management, Islamic Azad University , Beyza Branch , Iran Abstract The process of being affected of the investors in decision making from their sentiment has been considered in many recent researches in the field of the financial assets pricing. Some authors suggest that shifts in investor sentiment may in some instances bette r explain short- term movement in asset prices than any other set of fundamental factors. The present study tries to investigate the relation between the investors sentiment index and First and Second Market Indexes in Tehran Stock Exchange Market. This paper, an index was used in order to measure the available data on sentiment of the investors in facing the risks in a 142-month period (2001 – 2014) in Tehran Stock Exchange. The used index can reveal and present the situation of the Iranian capital Market in terms of the Investors Sentiments. The results obtained from the present study reveal a positive and significant relation between the investors’ sentiment Index of the Tehran Exchange First and Second Market Indexes; and also by using from Granger Causality Test, it was revealed that there is a mutual causality relation between the investors’ sentiment Indexes of the TEFMIX and TESMIX. Keywords: Behavioral Finance, Equity Market Sentiment Index, Tehran Stock Exchange Recebido: 27/08/2015 Aceito: 04/09/2015 17 1 Introduction to the future cash trends and investment risks, so he Traditional financial theory suggests that this belief is not created by the accessible that stock price shows basic and truths. The second assumption is this that fundamental value of stocks which reflects arbitrage is riskiest and costliest for sentimental T value of future cash trends. Based on investors. Therefore, rational investors or efficient market hypothesis, investors arbitragers are not more dynamic in terms of show rational behavior, i.e. they process all returning prices to the basic price. Modern accessible and available information and are behavioral finance believes that there are after maximizing expected favorability. restrictions for arbitrage. Accordingly, stock price’s changes are related to the systematic changes in fundamental values of 2. Literature Review the firm and sentimental behavior of investor has In this study, investors’ sentiment is no effect on return. Even if some investors create evaluated and its influence is measured on stock shock in supply and demand with their return. Investors’ sentiment can be defined as sentimental transactions, other rational “Investors’ Tendency to Speculation”. From this arbitragers will neutralize impact of these aspect, investors’ sentiment is led to the creation shocks. Therefore, stock’s price will remain at a of relative demand for speculative and gambling fundamental level [11]. But the evidences investments and this affair will have cross- indicate that investors do not use quantitative sectional impacts on stock price. But a question is methods for the determination of stock value. posed here: “Which factors will lead one stock to Judgments are based on subjective imaginations, be vulnerable to the investors’ tendency to unscientific data and mental and sentimental gambling? Subjectivity of pricing and evaluating conditions at stock market. Sentimental stocks may be considered as the most important variables, which are formed based on cognitive reason of the said Issuae [1]. restrictions, will study mental conditions of stock Another definition that can be explained for market activists [16]. Financial behavior is one of investors’ sentiment include as follows: “Margin the studies which is developed rapidly in this of Degree of Optimism and Pessimism of field and is tasked with studying decision- Shareholders to a Stock” [11]. The measurement making process of investors and their reaction method of investors’ sentiment can be classified towards various conditions of financial markets. into three groups: The first group of investors’ Moreover, financial behavior focuses more on sentiment index is based on survey methods influence of sentiments, personality, culture and which measures market sentiments directly. Of judgments of investors on investment decision this group, it can be referred to Michigan making. Daniel Kahneman is one of the founders Consumer Sentiment Index (MCSI). The indirect of this field of financial knowledge. Behavioral methods are in opposite direction of direct finance perspective shows that some changes in methods which are taken advantage of financial price of stocks and securities do not have any data in order to measure investors’ sentiment. Of basic reason and investor sentiment tendency direct methods, it can be referred to buy-sell plays a very important role in determination of imbalance, Barron’s Confidence Index, Equity prices [11]. As a matter of fact, dynamic Market Sentiment Index. The third group of interaction and interplay between Noise Traders measurement methods is related to the and rational arbitragers form stock prices. If one combined methods, the most important of which stock of Noise Traders exceeded and/or one can be referred to the combined index as stock of rational traders reduced, its price presented by Baker and Wurgler [2, 11]. Chen volatility is noticeable [16]. Behavioral finance and et al [4] showed that sentiments created by perspective represents two basic assumptions: social media (such as official websites and The first assumption is this that investors make dailies) have direct relationship with the current decision under the influence of their sentiment. and future stock returns. Influence of media is Here, sentiment, in the form of belief, is defined mainly stronger for the firms which their stocks Recebido: 27/08/2015 Aceito: 04/09/2015 18 are kept by the retail investors. Wu and et al [21] returns of small, newly-established, volatile, attributed and correlated influence of weekday nonprofit- yielding firms will face higher and stock return with investors’ sentiment for financial crises and vice versa. This subject the first time. Empirical estimates indicate that indicates that such stocks are priced lower than role of influence of weekday in return is similar truth relatively in declining periods of investors’ to the role of investors’ sentiment on return and sentiment. belongs to the stocks with high subjective In other study, Kumar and Lee [12] studied evaluation. For example, the stocks with low models related to the transaction of Noise market value are more affected by sentiment at Traders. Their findings indicated that retail the time when effect of weekday is stronger. systematic transactions clarify return changes of Also, in this study, high relationship was the stocks which are more paid attention by discovered between sentiment and return. Kim retail transactions (including stocks of small and Ha *11+ studied effect of investors’ sentiment firms, low price and ratio of low institutional on stock price. For this reason, they created four ownership) and this issue is outshined more sorted portfolio quintiles based on size, book to with regard to the stocks which enjoy higher market value, institutional ownership and price arbitrage cost. According to their conclusion, and concluded that investors’ sentiment affect they found out that tendencies and inclination of stock price of small-size Korean firms, low stock investors’ sentiment play a key role in creation of price and low ratio of book to market value return. Li [13] studied the measurement of coupled with low institutional ownership sentimental tendency risk of annual reports and systematically. Also, they concluded that adding concluded that the risk can predict future investors’ sentiment index to the pricing model returns. The firms which have major growth in of capital assets improves performance of model sentimental tendency risk, they will have and also clarifies effects of size, value and negative returns than other firms during 12 – momentum better. Ling and et al. [14] found out month period after publishing annual report. positive relationship between investors’ Jones and Bandopadhyaya [10] presented an sentiment and subsequent three-month returns index entitled "Equity Market Sentiment Index at two real private and public markets. They also (EMSI)" using model proposed by Persaud