Investigating The Asymmetric Relationship between Tehran Stock Market Return Cycles and Investor Sentiments Regime

Abstract

Behavioral economics and financial literature suggest that there are two distinct types of stock market investors who conduct differently. A portion of these investors operate professionally and conduct fundamental analyses. A second type of investor is one whose investment decisions are influenced by conjecture and market sentiment. Therefore, it is essential to the evolution of the stock market to examine the behavior of the second category of investors. This research examines the asymmetric relationship between investor sentiment and market returns on the Tehran Stock Exchange. To achieve this, data from 2010Q1 to 2021Q4 are analyzed using a Markov switching method of vector autocorrelation. According to the findings of this study, the joint probability distribution function between the Tehran Stock Exchange market and investor sentiment has two regimes. Regime 0 (bull market with optimistic sentiments) and regime 1 (bear market with pessimistic sentiments) are the two regimes. The study's findings indicate that the increase in investor sentiment during a bull market has no significant effect on the increase in stock returns, and that the stock market influences investor sentiment. This is the transaction's trend-following (herd) behavior. This substantiates the elevated prices on the Iranian capital market. The results for regime 1 (bear market) indicate that stock market pessimism is causally related to causality. The stock market stagnates due to pessimism regarding the stock market.