Nonlınear Dynamıcs Between Investor Sentıment And Stock Movements: Evıdence From Borsa Istanbul

Abstract

The aim of this study is to examine nonlinear dynamics between both rational and irrational components of investor sentiment and stock market movements. In order to provide a proper explanation about total investor sentiment, we decompose its irrational and rational components. We examine the nonlinear dynamics between irrational and rational components of investor sentiment, stock market returns and volatility of the BIST 100 Index utilizing threshold regression models. Our findings reveal that (i) in both low and high return states, rational investor sentiment positively impact the stock market returns, (ii) the rational sentiment have more impact in the high return state than that of the low return state, (iii) in the high volatility state, rational investor sentiment negatively impact the stock market volatility. Results suggest that optimistic environment originating from the rational component positively affects the stock market returns where the investors’ positive expectations shape the economic environment by decreasing the uncertainty and the volatility of stock market.