Investigating the Effect of Oil Revenues on Herding Behavior in the Tehran Stock Exchange: An Analysis Based on the FAVAR Model

The efficiency and dynamics of the stock exchange are significantly influenced by investor behavior. One of the key behavioral patterns affecting this market is the phenomenon of herding behavior, which can lead to irrational fluctuations, the formation of price bubbles, and ultimately a decrease in market efficiency. This behavior is particularly crucial in oil-dependent economies, as oil price fluctuations directly affect not only national revenues but also the stability of financial markets. In this regard, the present study examines the relationship between changes in oil revenues and herding behavior in Iran's stock market. To achieve this objective, quarterly data on 62 economic variables from Iran and the global economy were used for the period from 2001 to 2021. Furthermore, since herding behavior is an unobservable variable, it was first quantified using the method proposed by Hwang and Salmon (2004). In the second stage, the effect of oil revenues on this variable was investigated using the FAVAR model. The results of this study indicate that herding behavior has intensified in the Iranian stock market over the past decade, peaking in 2019 and 2020. The results obtained from the impulse response functions confirm that the oil revenue variable has a negative and statistically significant impact on the herding behavior variable. Based on the results of the variance decomposition of the herding behavior variable, oil revenues were able to explain up to 6.2 percent of the changes in the herding behavior variable.