Measuring the Effect of Noise Trading on Bubbles in Tehran Stock Exchange

tohidi, mohammad

doi:10.52547/jemr.11.42.51

Volume 11, Issue 42 (12-2020) jemr 2020, 11(42): 51-81 | Back to browse issues page

‎ 10.52547/jemr.11.42.51

‎ 20.1001.1.22286454.1399.11.42.2.8

Mendeley

Zotero

RefWorks

tohidi M. Measuring the Effect of Noise Trading on Bubbles in Tehran Stock Exchange. jemr 2020; 11 (42) :51-81
URL: http://jemr.khu.ac.ir/article-1-2012-en.html

Measuring the Effect of Noise Trading on Bubbles in Tehran Stock Exchange

Mohammad Tohidi ^*

Imam Sadiq University , tohidi@isu.ac.ir

Abstract: (2448 Views)

Noise traders make decisions based on market sentiment and buy and sell assets based on unrelated information. These traders generally have poor timing, follow trends, and overreact to good or bad news. The experience of financial markets shows that noise traders cause excess volatility and deviation of the stock value from its intrinsic value. This study seeks to evaluate the role of noise traders on the occurrence of bubbles in the Tehran Stock Exchange in the period 2011 to 2017 .Therefore, the research hypothesis is: "The effect of noise trading on the occurrence of bubbles in the Tehran Stock Exchange is positive and significant." In this study, PCA method is used to extract a composite sentiment index, The GSADF method also is employed to determine the bubble periods of the Tehran Stock Exchange price index. Finally, the logit method is applied to measure the effect of noise trading on the bubble in the stock market price index. The results show that the effect of noise trading on the occurrence of bubbles is positive and significant. Also, the estimation of the final marginal effect indicates that the increase of one unit of optimistic sentiment and optimistic sentiment with a lag in the stock market increases the probability of bubbles by 24 and 28%, respectively.

Keywords: Noise Traders, Investor Sentiment, Bubble, Tehran Stock Exchange

Full-Text [PDF 2378 kb] (810 Downloads)

Type of Study: Applicable | Subject: پولی و مالی
Received: 2020/05/17 | Accepted: 2021/02/8 | Published: 2021/04/20

References

1. Abbasian, E., Farzanegan, E. (2012). Tehran Stock Exchange Bubbles and Noise Traders Behavior. Journal of Economic Research (Tahghighat- E- Eghtesadi), 46(3), pp 133-153. (in Persian)

2. Aziz Khan, Mehwish & Ahmad, Eatzaz (2018), Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead-Lag Relationship with Returns: Evidence from Pakistan, Sustainability, 11(1), pp 1-20. [DOI:10.3390/su11010094]

3. Baker M. and Wurgler J. (2006), Investor Sentiment and the Cross Section of Stock Returns, Journal of Finance, 61(4), pp 1645-1680 [DOI:10.1111/j.1540-6261.2006.00885.x]

4. Baker, M. and Wurgler J. (2007), Investor Sentiment in the Stock Market. Journal of Economic Perspectives, 21 (2), pp 129-152. [DOI:10.1257/jep.21.2.129]

5. Beer, Francisca and Zouaoui, Mohamed (2011), Measuring Investor Sentiment in the Stock Market, Working Papers CREGO 1110901, Université de Bourgogne, CREGO EA7317 Centre de recherches en gestion des organisations. [DOI:10.2139/ssrn.1939527]

6. Berger David, Turtle Harry J., (2015), Sentiment bubbles, Journal of Financial Markets, 23 (3), pp 59-74. [DOI:10.1016/j.finmar.2015.01.002]

7. Beyer, S.B., Hughen, J.C. and Kunkel, R.A. (2020), Noise Trading and Stock Market Bubbles: What the Derivatives Market is Telling Us, Managerial Finance, 46 (9), pp 1165-1182. [DOI:10.1108/MF-01-2019-0052]

8. Biabany Khameneh, K., Khazaei, S., Afsharian, A. (2016). Testing for Explosive behavior and bubbles In Iran's Stock Market. Financial Knowledge of Securities Analysis, 9 (29), pp 111-125. (in Persian)

9. Black, F., (1986), Noise, Journal of Finance, Volume 41(3), pp 528-543. [DOI:10.1111/j.1540-6261.1986.tb04513.x]

10. Brown, G.W. and M.T. Cliff, (2004), "Investor Sentiment and the Near Term Stock Market". Journal of Empirical Finance, 11(1), pp 1-27. [DOI:10.1016/j.jempfin.2002.12.001]

11. Caspi, Itamar. (2016). Rtadf: Testing for Bubbles with EViews. Journal of Statistical Software. 81, pp 1-16. [DOI:10.18637/jss.v081.c01]

12. Chakraborty, M. and Subramaniam, S. (2020), Asymmetric Relationship of Investor Sentiment with Stock Return and Volatility: Evidence from India, Review of Behavioral Finance, 12 (4), pp. 435-454. [DOI:10.1108/RBF-07-2019-0094]

13. Chakravarty, S. (2001), Stealth Trading: Which Traders' Trades Move Stock Prices. Journal of Financial Economics, 61 (2), pp 289 - 307. [DOI:10.1016/S0304-405X(01)00063-0]

14. Chen Haiqian, Chong Terence, Tai Leung & She, Yingni. (2013), A Principal Component Approach to Measuring Investor Sentiment in China, MPRA Paper 54150, University Library of Munich, Germany

15. Chen, C. H.; Hafner, C.M. (2019), Sentiment-Induced Bubbles in the Cryptocurrency Market. Journal of Risk and Financial Management, 12 (2), 53. [DOI:10.3390/jrfm12020053]

16. Chowdhury H, Sharmin R, Rahman, M. (2014), Effect of Sentiment on the Bangladesh Stock Market Returns, 12th EBES Conference, Nanyang Technological University, Singapore [DOI:10.2139/ssrn.2416223]

17. Chuangxia Huang, Xin Yang, Xiaoguang Yang, and Hu Sheng. (2014), an Empirical Study of the Effect of Investor Sentiment on Returns of Different Industries, Mathematical Problems in Engineering, Research Article, Vol. 45, pp 1-11 [DOI:10.1155/2014/545723]

18. Chue, Timothy & Gul, Ferdinand & Mian, G. (2019). Aggregate Investor Sentiment and Stock Return Synchronicity. Journal of Banking & Finance. 108 (C). [DOI:10.1016/j.jbankfin.2019.105628]

19. Cuong N. & Ishaq B.M., (2015). Investor Sentiment and Idiosyncratic Volatility Puzzle: Evidence from the Chinese Stock Market. Journal of Stock & Forex Trading. 4 (3), pp 1-13. [DOI:10.4172/2168-9458.1000158]

20. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann. (1990), Noise Trader Risk in Financial Markets, Journal of Political Economy, University of Chicago Press, 98(4), pp 703-738. [DOI:10.1086/261703]

21. De Long, J. B., Shleifer, A., Summers, L., Waldman, R. J. (1990). Positive Feedback Investment Strategies and Destabilizing Rational Speculation. Journal of Finance, 45(2), pp 379-395 [DOI:10.1111/j.1540-6261.1990.tb03695.x]

22. De Long, J.B., Shleifer, A., Summers, L.H. and Waldmann, R.J. (1989), the Size and Incidence of the Losses from Noise Trading, the Journal of Finance, 44 (3), pp 681-696. [DOI:10.1111/j.1540-6261.1989.tb04385.x]

23. Doojin Ryu, Heejin Yang & Doowon Ryu (2017) Investor Sentiment, Asset Returns and Firm Characteristics: Evidence from the Korean Stock Market, Investment Analysts Journal, 46(2), pp 132-147. [DOI:10.1080/10293523.2016.1277850]

24. Frazzini, Andrea & Lamont, Owen A. (2008), Dumb Money: Mutual fund Flows and the Cross-Section of Stock Returns, Journal of Financial Economics, Elsevier, 88(2), pp 299-322, [DOI:10.1016/j.jfineco.2007.07.001]

25. Frugier, Alain. (2016). Returns, Volatility and Investor Sentiment: Evidence from European Stock Markets. Research in International Business and Finance. 38 (3), pp 45-55 [DOI:10.1016/j.ribaf.2016.03.007]

26. Glushkov, Denys. (2006), Sentiment Beta, Available at SSRN: https://ssrn.com/abstract=862444. [DOI:10.2139/ssrn.862444]

27. Greenwood, Robin, and Nagel Stefan. (2008), Inexperienced Investors and Bubbles, NBER Working Paper, No.w14111, Available at SSRN: https://ssrn.com/abstract=1149357 [DOI:10.3386/w14111]

28. Grossman, S., (1976), "On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information", Journal of Finance, 31, pp 573-585. [DOI:10.1111/j.1540-6261.1976.tb01907.x]

29. Heidarpour, F; Tari Verdi, Y and Mehrabi, M, (2013).the Effect aof Investor Sentiment on the Stock Return. Financial Knowledge of Securities Analysis 6 (17), pp 1-13. (in Persian)

30. Jafari Samimi A, Balounejad Nouri R. (2015). The Test of Multiple Price Bubbles in Tehran Stock Market: an Application of the Generalized Supremum Augmented Dickey-Fuller. Journal of Economic Modeling Research, 6 (21), pp 7-33. (in Persian) [DOI:10.18869/acadpub.jemr.6.21.7]

31. Kline, R. B. (2005). Principles and Practice of Structural Equation Modeling, (2nd Edition). New York, NY: Guilford Press.

32. Kurov, Alexander (2008), Information and Noise in Financial Markets: Evidence from the E‐Mini Index Futures, Journal of Financial Research, Southern Finance Association; Southwestern Finance Association, 31(3), pp 247-270. [DOI:10.1111/j.1475-6803.2008.00239.x]

33. Ling, David C. and Naranjo, Andy and Scheick, Benjamin (2010), Investor Sentiment and Asset Pricing in Public and Private Markets, 46th Annual AREUEA Conference Paper, Available at SSRN: https://ssrn.com/abstract=1717110

34. Long, W., Zhao M., Tang, Y. (2021), Can the Chinese Volatility Index Reflect Investor Sentiment? International Review of Financial Analysis, Volume 73 (C). [DOI:10.1016/j.irfa.2020.101612]

35. Nelson, D., (1991), Conditional Heteroscedasticity in Asset Returns: A New Approach, Econometrica, Volume 59 (2), pp 347-370. [DOI:10.2307/2938260]

36. Pei-En, Lee. (2019), the Empirical Study of Investor Sentiment on Stock Return Prediction, International Journal of Economics and Financial Issues, 9(2), pp 119-124

37. Phillips, P. C. B., Shi, S. P. and Yu, J. (2014), Specification Sensitivity in Right Tailed Unit Root Testing for Explosive Behaviour, Oxford Bulletin of Economics and Statistics, 76(3), pp 315-333. [DOI:10.1111/obes.12026]

38. Phillips, P.C.B., Wu, Y., and Yu, J. (2011), Explosive Behaviour in the 1990s Nasdaq: When did Exuberance Escalate Asset Values? International Economics Review, 52 (1), pp 201-226. [DOI:10.1111/j.1468-2354.2010.00625.x]

39. Podolski, Edward and Kalev, Petko S. and Duong, Huu Nhan (2008), Deafened by Noise: Do Noise Traders Affect Volatility and Returns? 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: https://ssrn.com/abstract=1253042. [DOI:10.2139/ssrn.1253042]

40. Rasekhi S, Elmi Z M, Shahrazi M. (2017) Testing for Multiple Bubbles in Iranian Foreign Exchange Market: the Application of RTADF Unit Root Tests. Journal of Economic Modeling Research. 7 (27), pp 7-39. (in Persian) [DOI:10.29252/jemr.7.27.7]

41. Rasekhi, S., Shahrzadi, M., Elmi, Z., (2016). Detecting the Price Bubbles Periods: A Case Study of Tehran Stock Exchange Market. Quarterly Journal of Quantitative Economics, 13(3), pp 25-55. (in Persian)

42. Rehman, M. (2013). Investor's Sentiments and Stock Market Volatility: an Empirical Evidence from Emerging Stock Market. Pakistan Journal of Commerce and Social Sciences, 7 (1), pp 80-90.

43. Rupande, Lorraine & Muguto, Hilary Tinotenda & Muzindutsi, Paul-Francois. (2019). Investor Sentiment and Stock Return Volatility: Evidence from the Johannesburg Stock Exchange. Cogent Economics & Finance. 7 (1). pp 1-16. [DOI:10.1080/23322039.2019.1600233]

44. Seok, Sang & Cho, Hoon & Ryu, Doojin. (2018). Firm-Specific Investor Sentiment and Daily Stock Returns. The North American Journal of Economics and Finance. 50 (C). [DOI:10.1016/j.najef.2018.10.005]

45. Setayesh, M., Shamsedini, K. (2016). An Investigation of the Relationship between Investor Sentiment and Price Stocks in Tehran Stock Exchange (TSE). Journal of Accounting Advances, 8(1), pp 103-125. (in Persian)

46. Shekarkhah, J., hazrati, A. (2018). Corporate Transparency and Impact of Investor Sentiment on Stock Prices. Empirical Research in Accounting, 7(4), pp 1-31. (in Persian)

47. Shiller, Robert, (1984), Stock Prices and Social Dynamics, Brookings Papers on Economic Activity, 15 (2), pp 457-510 [DOI:10.2307/2534436]

48. Shiller, Robert, J. (2003). "From Efficient Markets Theory to Behavioral Finance." Journal of Economic Perspectives, 17 (1), pp 83-104. [DOI:10.1257/089533003321164967]

49. Summers, L.H. (1986), Does the Stock Market Rationally Reflect Fundamental Values? The Journal of Finance, 41(3), pp 591-601. [DOI:10.1111/j.1540-6261.1986.tb04519.x]

50. Tohidi, M. (2020). Extracting Composite Sentiment Index for Tehran Stock Exchange. Journal of Asset Management and Financing, 8(2), pp 49-68. (in Persian)

51. Uygur, U. and Taş, O. (2012), "Modeling the Effects of Investor Sentiment and Conditional Volatility in International Stock Markets", Journal of Applied Finance & Banking, 2 (5), pp 1-15.

52. Uygur, U. and Taş, O. (2014), the Impacts of Investor Sentiment on Returns and Conditional Volatility of International Stock Markets, Quality & Quantity, 48 (3), pp 1165-1179. [DOI:10.1007/s11135-013-9827-3]

53. Verma, Rahul and Verma, Priti, (2007), Noise trading and stock market volatility, Journal of Multinational Financial Management, 17 (3), pp 231-243 [DOI:10.1016/j.mulfin.2006.10.003]

54. Verma. R., Baklaci, H., Soydemir, G., (2008). The Impact of Rational and Irrational Sentiments of Individual and Institutional Investors on DJIA and S&P500 Index Returns. Applied Financial Economics. 18(16), pp 1303-1317. [DOI:10.1080/09603100701704272]

55. Wang, L. H., Yang, C. P., (2005). Identification and Formation Mechanism of Irrational Bubbles. Management Review, 17(3), pp 9-13. (in Chinese)

56. Watkins, B. (2002); Investor Sentiment, Trading Patterns and Return Predictability; (Electronic Thesis or Dissertation). Retrieved from https://etd.ohiolink.edu.

57. Wei-Fong Pan (2020), Does Investor Sentiment Drive Stock Market Bubbles? Beware of Excessive Optimism, Journal of Behavioral Finance, 21(1), pp 27-41. [DOI:10.1080/15427560.2019.1587764]

58. Willman, P., Fenton, M., Nicholson, N., Soane, E. (2006), "Noise Trading and the Management of Operational Risk; Firms, Traders and Irrationality in Financial Markets", Journal of Management Studies, 43(6), pp 1357 - 1374 [DOI:10.1111/j.1467-6486.2006.00648.x]

59. Winmore Mazviona., B (2015), Measuring Investor Sentiment on the Zimbawe Stock Exchange, Asian Journal of Economic Modelling, 3(2), pp 21-32 [DOI:10.18488/journal.8/2015.3.2/8.2.21.32]

60. Y. Wu and L. Y. Han. (2007), "Imperfect Rationality, Sentiment and Closed End Fund Puzzle", Economic Research Journal, 42 (3), pp 117-129

61. Yang, Chunpeng & Wu, Huihui. (2019). Chasing Investor Sentiment in Stock Market. The North American Journal of Economics and Finance, 50 (C). [DOI:10.1016/j.najef.2019.04.018]

62. Zhu, Xiangxiang. (2012). Investor Sentiment and Volatility of Stock Index --An Empirical Analysis from the Perspective of Behavioral Finance. Advances in Applied Economics and Finance, 3, pp 627-629.

63. Zongyi, Hu & Chao, Li, (2015). Investor Sentiment and Irrational Speculative Bubble Model, MPRA Paper 62108, Germany, University Library of Munich,