Asymmetric Effect of Investor Sentiment and Its Volatility on Trading Volume and Stock Returns: Evidence from the Tehran Stock Exchange

ObjectiveIn recent years, there has been a paradigm shift from traditional approaches to behavioral finance perspectives. Behavioral finance, or colloquially investor sentiment, has gained popularity as a modern approach to asset pricing due to empirical support for the topic. There has been a renewed interest in understanding investor behavior in emerging stock markets. Accordingly, the present study aims to identify the asymmetric effect of investor sentiment on trading value and stock returns in the Tehran Stock Exchange. MethodsThis study's statistical population includes all companies listed on the Tehran Stock Exchange from 2016 to 2022. The number of these companies varied on different days during the period due to initial public offerings, transfers between the OTC and the stock exchange, and delistings. The Arms index also called the short-term trading Index, was used to measure investor sentiment, and the exponential GARCH model was used to measure sentiment fluctuations. Also, the transaction value and stock return models were estimated using mixed data-based methods. ResultsAccording to the findings, investor sentiment had a positive effect on transaction value. The effect of investor sentiment was greater when sentiment was positive than when it was negative. Also, sentiment fluctuations had a positive and significant effect on transaction value. On the other hand, the asymmetric effect of investor sentiment fluctuations on transaction value was significant. The results indicated that the effect of positive sentiment fluctuations was greater than the effect of negative sentiment fluctuations on transaction value. On the other hand, the increase in the dollar exchange rate, as a control variable, had a direct effect on transaction value, leading to its increase. Also, the effect of growth in fixed-income fund trading, as a control variable, was negative and significant. According to the results of estimating the stock return equation, with increasing pessimism and rising negative sentiment in the market, stock returns decrease during the period under review and vice versa. On the other hand, the dummy variable coefficient for investor sentiment is significant, which indicates the asymmetric effect of sentiment fluctuations on stock returns. The findings suggest that the effect of positive sentiment on stock returns is greater than that of negative sentiment. In addition, investor sentiment fluctuations have a positive and significant effect on stock returns. The asymmetric effect of investor sentiment risk on transaction value was significant. Finally, when investor sentiment was negative, the effect of sentiment fluctuations on stock returns was greater than when investor sentiment was positive in the market. ConclusionAccording to the results, the following hypotheses were not confirmed: the effect of positive sentiment fluctuations on transaction value is greater than that of negative sentiment fluctuations, and when investor sentiment is negative, the effect of sentiment fluctuations on stock returns is greater than when investor sentiment is positive in the market. However, the other research hypotheses were confirmed.