Market Sentiment and Stock Market Volatility: Evidence from Tehran Stock Exchange

This study aimed to evaluate the significance and severity of the relationship between market sentiment and the volatility of the Tehran Stock Exchange Price Index (TEPIX). We drew on the principal component analysis (PCA) to provide a composite sentiment index using a set of proxies. In addition, ARIMA-E-GARCH hybrid models were applied to model the volatility of the TEPIX and other control variables. Subsequently, GLS regression was used to measure the impact of market sentiment and the control variables variation on the volatility of the TEPIX. The findings showed that the influences of optimistic and pessimistic sentiment on the volatility of TEPIX were both statistically significant and respectively, negative and positive. However, the severity of these negative and positive effects was slight. Furthermore, we found that the stock exchange volatility was highly affected by the volatility of the inflation and the liquidity much more than the other variables such as optimistic and pessimistic sentiment.