Market Sentiment and Volatility of Stock Market: Evidences from the Tehran Stock Exchange

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