The role of investor sentiments on stock market returns and volatility: Evidence from Turkey and the U.S.

摘要

THE PROBLEM. The purpose of this study is to investigate the impact of Turkish and U.S. investor sentiments on the Istanbul Stock Exchange (ISE) and to examine whether investor sentiment, stock returns, and volatility are related.;METHOD. This study examined the impact of investor sentiment on Turkish stock market returns and volatility for the period of January 2004 to December 2010. First, regression analyses were applied to examine the impact of market fundamentals on investor sentiment. Second, the study decomposed sentiment variables into rational and irrational components based on the results of regression analysis. Then it used the impulse response functions (IRFs) generated from the VAR model to examine the effects of unanticipated movements in Turkish investor sentiment and U.S. investor sentiment on both stock returns and volatility of the ISE respectively.;RESULTS. The test results provided empirical evidence, consistent with behavioral finance theory, that consumer confidence surveys are a good proxy for measuring the impact of investor sentiment on the stock market. The study also showed that investor sentiments have a significant impact on the Turkish stock market. In addition, this study provided evidence that U.S. institutional and individual investor sentiments have an impact on the ISE. Although these results provide additional empirical support to show the impact of both the rational and irrational components of investor sentiment on stock market behavior, the rational sentiments of U.S. investors have a much greater effect than irrational investors on the Turkish stock market. Therefore, the results suggest that U.S. institutional investor sentiments are transmitted to Turkey at a greater magnitude than U.S. individual investor sentiment.