Extracting Composite sentiment Index for Tehran Stock Exchange

Abstract

Objective:Hardly are traders inclined to indicate sentiment in the classical finance, however the behavioral finance paradigm shows that in some cases stock price changes have no fundamental triggers, and just the emotional tendency of the investors play the stimulant role in determining prices. Method: Investor sentiment is defined as the tendency of market participants for speculation and this tendency can be related to the psychological state of the minds of investors. Given the fact that distressed traders are influenced by their emotions and the total emotion of the market, emotional tendency indicators are used to explain the behavior of these types of traders. In this research, the emotional tendency indicators are extracted in two ways: direct approach (survey method) and indirect approach (through the analysis of statistics and market data). Results:Furthermore, this study, based on literature review and stock market conditions in Iran, applied the principal component analysis method (PCA) with different sentiment variables and indicators for extracting a composite sentiment index for extracting noise traders in Iranian stock market. Regarding the special value of the first component and the factor load (coefficients) of the variables, three variables are used in the final index. These three variables are: "Monthly volume of retail transactions by the volume of total stock trades", "Monthly volume of online transactions by the volume of total stock trades", and "Monthly volumes of stock trades by wholesalers and wholesalers by the volume of total market transactions".

Keywords

• sentiment index
• behavioral finance
• composite index
• principal component analysis
• tehran stock exchange