Measuring the Effect of Noise Trading on price volatility in Tehran Stock Exchange
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

Measuring the Effect of Noise Trading on price volatility in Tehran Stock Exchange

Document Type : Original Article

Authors
mohammad tohidi 1
mohammad mahdi fereydooni 2
1 Associate Professor, Department of Financial Management, Faculty of Islamic Studies and Management, Imam Sadiq (a.s) University, Tehran, Iran
2 Ph.D. Student, Department of Financial Engineering, Imam Sadiq University, Tehran, Iran
10.22034/jse.2021.11868.1914
Abstract
Noise traders are traders who make decisions based on market sentiment, and in the behavioral financial literature, more volatility may indicate more noise traders in the market and less willing or ability of rational traders to neutralize their effects.
The present study analyzes and evaluates the relationship between noise traders and volatilities in the price index of Tehran Stock Exchange. This research is practical and quantitative. In this study, first, the sentiment index is extracted by EMSI method to explain the behavior of noise traders. Then, to model and derive the volatilities of the price index of Tehran Stock Exchange and control variables, the EGARCH model is used, and in the last step to measure the effect of traders' optimistic and pessimistic sentiment on the volatility of the stock price index, the ordinary least squares method ( OLS) or generalized (GLS) is applied. The results show that the effect of optimistic and pessimistic sentiment on stock market volatilities are negative and positive, respectively, and both are significant. The value of the coefficients also indicates the intensity of the small effect of optimistic and pessimistic sentiment on the stock market volatility.
Keywords
Noise Traders
Investor Sentiment
Bubble
Tehran Stock Exchange
توحیدی، محمد. (2020). استخراج شاخص ترکیبی گرایش احساسی در بورس اوراق بهادار تهران. مدیریت دارایی و تأمین مالی، 8 (2)، 49-68.
توحیدی، محمد (1399). سنجش اثر معامله‌گران اختلال‌زا در بروز حباب در بورس اوراق بهادار تهران. تحقیقات مدلسازی اقتصادی. ۱۱ (۴۲) :۵۱-۸۱.
سارنج، علیرضا؛ تهرانی، رضا؛ عباسی موصلو، خلیل و ندیری، محمد (1397)، شناسایی رفتارهای معاملاتی و ریسک معامله‏‌‏گران اخلال گر در بازار سهام ایران، راهبرد مدیریت مالی، 6 (22)، 31-58.
ستایش، محمدحسین؛ شمس‌الدینی، کاظم. (1395). بررسی رابطۀ بین گرایش احساسی سرمایه‌گذاران و قیمت سهام شرکت‌ های پذیرفته‌شده در بورس اوراق بهادار تهران. پیشرفت‌های حسابداری، 8 (1)، 103-130.
شیرزادی، احمدرضا؛ رحیم زاده، اشکان؛ نقیلو، احمد و زمانی، زهرا. (1401). اثر خروج آمریکا از برجام و معاملات اختلال‏‌‏زا بر بازدهی بازار بورس اوراق بهادار تهران. فصلنامه بورس اوراق بهادار، 15(59)، 141-160. 10.22034/jse.2021.11641.1740 doi:
عباسیان، عزت الله و فرازنگان، الهام (1390)، رفتار معامله‌گران اختلال‏‌‏زا و حباب در بورس اوراق بهادار تهران، مجله تحقیقات اقتصادی، 46 (3)، 133-153.
عبدالباق، عبدالمجید؛ صبور، سیاوش و باقری، رفیع. (2019). ناهمسانی شرطی نمایی (E-Garch) در مدل سازی نوسانات مبتنی بر معاملات اختلال‏‌‏زا. دانش مالی تحلیل اوراق بهادار، 12(44)، 23-35.‎
محمدزاده، عبدالغفور؛ حیرانی، فروغ و تفتیان، اکرم. (1400). فراتحلیل (متاآنالیز) گرایش احساسی سرمایه‏‌‏گذاران و بازده سهام. فصلنامه بورس اوراق بهادار، 14(55)، 65-86. 10.22034/jse.2020.11249.1460 doi:
Abbasian, E., & Farzanegan, E. (2012). Tehran Stock Exchange Bubbles and Noise Traders Behavior. Journal of Economic Research (Tahghighat- E- Eghtesadi), 46(3), 133-153. (In Persian).
Abdelhédi-Zouch, M., Abbes, M. B., & Boujelbène, Y. (2015). Volatility spillover and investor sentiment: Subprime crisis. Asian Academy of Management Journal of Accounting & Finance, 11 (2), 1-37. (In Persian).
Abdolbaghi, A., Sbour, S., & Bagheri Rafi, M. (2019). E-Garch and Modeling of Market Volatility Based on Noise Trading. Financial Knowledge of Securities Analysis, 12(44), 23-35. (In Persian).
Alfano, S. J., Feuerriegel, S., & Neumann, D. (2015). Is news sentiment more than just noise? Twenty-Third European Conference on Information Systems, Münster, Germany, (pp1-16). Conference Proceedings.
Arestis, P., Demetriades, P. O., & Luintel, K. B. (2001). Financial development and economic growth: the role of stock markets. Journal of money, credit and banking, 16-41.
Audrino, F., Sigrist, F. & Ballinari, D. (2020), The impact of sentiment and attention measures on stock market volatility, International Journal of Forecasting, 36 (2),  334-357.
Bahloul, W., & Bouri, A. (2016). The impact of investor sentiment on returns and conditional volatility in US futures markets. Journal of Multinational Financial Management, 36 (1), 89-102.
Bandopadhyaya, A., Jones, A. (2006), Measuring investor sentiment in equity markets. Journal of Asset Management, 7, 208–215. https://doi.org/10.1057/palgrave.jam.2240214
Barberis, N. and Thaler, R. (2003) A Survey of Behavioral Finance. Handbook of the Economics of Finance, 1, 1053-1128. https://doi.org/10.1016/S1574-0102(03)01027-6.
Barrot, J. N., Kaniel, R., & Sraer, D. (2016). Are retail traders compensated for providing liquidity? Journal of Financial Economics, 120(1), 146–168.
Black, F. (1976). Studies of stock price volatility changes. American Association of Business & Economics Statistics, 5 (2), 177-181.
Black, F. (1986). Noise. Journal of Finance, 41(3), 528-543. 
Campbell, J. Y., & Kyle, A. S. (1993). Smart money, noise trading and stock price behaviour. The Review of Economic Studies, 60 (1), 1-34.
Chakravarty, S. (2001), Stealth Trading: Which Traders’ Trades Move Stock Prices. Journal of Financial Economics, 61 (2), 289-307. 
Chau, F., Deesomsak, R., & Koutmos, D. (2016). Does investor sentiment really matter? International Review of Financial Analysis, 48 (1), 221-232.
Chau, F., Deesomsak, R., & Lau, M. C. (2011). Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets. International Review of Financial Analysis.
Chuang, W. J., Ouyang, L. Y., & Lo, W. C. (2010). The impact of investor sentiment on excess returns: A Taiwan stock market case. International Journal of Information & Management Sciences, 21 (1), 13-28. 
Dai, Z. M., & Yang, D. C. (2018). Positive feedback trading and investor sentiment. Emerging Markets Finance & Trade, 54 (10), 2400-2408.
Dash, S. R., & Maitra, D. (2018). Does sentiment matter for stock returns? Evidence from Indian stock market using wavelet approach. Finance Research Letters, 26, 32-39.
De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703-738. 
Engelberg, J. E., Reed, A. V., & Ringgenberg, M. C. (2018). Short-selling risk. Journal of Finance, 73(2), 755–786.
Fernandes, J. L. B.,Pena, J.I., &Tabak, B. (2010). Behavior finance and estimation risk in stochastic portfolio optimization. Applied Financial Economics, 20(9), 719-738.
Ferreira, T. S. V., Machado, M. A. V., & Silva, P. Z. P. (2021). Asymmetric impact of investor sentiment on Brazilian stock market volatility. Revista de Administração Mackenzie, 22(4), 1–28. doi:10.1590/1678-6971/eRAMF210208.
Forbes, William. (2009). Behavioural finance: John Wiley & Sons.
Gang He, Shuzhen Zhu, Haifeng Gu (2020), The Nonlinear Relationship between Investor Sentiment, Stock Return, and Volatility, Discrete Dynamics in Nature and Society. https://doi.org/10.1155/2020/5454625.
Ghonghadze, J., & Lux, T. (2016). Bringing an elementary agent-based model to the data: Estimation via GMM and an application to forecasting of asset price volatility. Journal of Empirical Finance, 37(1), 1-19.
Grossman, S., (1976), “On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information”, Journal of Finance, 31, 573-585.
H, Haritha P and Rishad, Abdul, (2020), An empirical examination of investor sentiment and stock market volatility: evidence from India, Financial Innovation, 6 (1): 1-15.
Hessary, Y. K., & Hadzikadic, M. (2017). Role of behavioural heterogeneity in aggregate financial market behavior: An agent-based approach. Procedia Computer Science, 108 (1), 978-987.
Kumari, J., & Mahakud, J. (2016). Investor sentiment and stock market volatility: Evidence from India. Journal of Asia-Pacific Business, 17 (2), 173-202. 
Kurov, A. (2008). Investor sentiment, trading behavior and informational efficiency in index futures markets. Financial Review, 43 (1), 107-127. 
Levin, Sheen & Zajac, Edward.J (2001), the Social Life of Financial Bubbles, Institutional Theory Conference, 2-10.
Lin, M., Sias, R. W., & Wei, Z. (2018). The survival of noise traders: Evidence from peer-to-peer lending (Research Paper No. 18–22). Georgia: Georgia Tech Scheller College of Business.
Ljungqvist, A., & Qian, W. (2016). How constraining are limits to arbitrage? Review of Financial Studies, 29(8), 1975–2028.
Mei-Chen Lin (2009). Sentiment on cross-sectional stock returns and volatility. Investment Management and Financial Innovations, 6 (1).
Mohammadzadeh, A., Heirany, F., taftiyan, A. (2021). Meta-Analysis of the Relationship between Investor Sentiment and Stock Returns. Journal of Securities Exchange, 14(55), 65-86. doi: 10.22034/jse.2020.11249.1460. (In Persian).
Naik, P. K., & Padhi, P. (2016). Investor sentiment, stock market returns and volatility: evidence from National Stock Exchange of India. International Journal of Management Practice, 9(3), 213-237.
Nelson, D. B.  (1991), Conditional heteroscedasticity in asset returns: A new approach, Econometrica, 59 (2), 347-370.
Palomino, F. (1996). Noise trading in small markets. The journal of finance, 51(4), 1537-1550.
Persaud, A., (1996), Investors’ Changing Appetite for Risk. J.P. Morgan Securities Ltd., Global FX Research.
Podolski, E., Kalev, P. S., & Duong, H. N. (2008). Deafened by Noise: Do Noise Traders Affect Volatility and Returns? In 21st Australasian finance and banking conference.
Rahman, M. A., Shien, L. K., & Sadique, M. S. (2013). Swings in Sentiment and Stock Returns: Evidence from a Frontier Market. International Journal of Trade, Economics & Finance, 4 (6), 347-363.
Rupande, L., Muguto, H. T., & Muzindutsi, P. F. (2019). Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange. Cogent Economics & Finance, 7(1), 7(1), 1600233.
Saranj, A., Tehrani, R., Abbasi Museloo, K., & Nadiri, M. (2018). Identifying the Trading Behaviors and Risk of Noise Traders in Iran Stock Market. Financial Management Strategy, 6(3), 31-58. doi: 10.22051/jfm.2018.19836.1639. (In Persian).
Setayesh, M. H., & 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), 103-125. doi: 10.22099/jaa.2016.3854. (In Persian).
Shefrin, Hersh; Statman, Mier. (1994). "Behavioural capital asset pricing theory". Journal of Financial and Quantitative Analysis, 29, 323-349.
Shiller, Robert J; Fischer, Stanley and Friedman, Benjamin M. (1984). "Stock Prices and Social Dynamics". Brookings Papers on Economic Activity, 457-510.
shirzadi, A., rahimzade, A., naghilu, A., zamani, Z. (2022). Effect of US withdrawal from JCPOA and noise trading on return of the Tehran Stock Exchange market. Journal of Securities Exchange, 15(59), 141-160. doi: 10.22034/jse.2021.11641.1740.
Shleifer, Andrei; summers, Lawrence H. (1990). "The Noise Trader Approach to Finance". Journal of Economic Perspectives, 4 (2), 19-33.
Tohidi. M. Measuring the Effect of Noise Trading on Bubbles in Tehran Stock Exchange. JEMR 2020; 11 (42): 51-81. (In Persian).
Tohidi, M. (2020). Extracting Composite Sentiment Index for Tehran Stock Exchange. Journal of Asset Management and Financing, 8(2), 49-68. (In Persian).
Uygur, U. and Taş, O. (2014), the Impacts of Investor Sentiment on Returns and Conditional Volatility of International Stock Markets, Quality & Quantity, 48(3), 1165-1179. 
Verma, Rahul and Verma, Priti, (2007), Noise trading and stock market volatility, Journal of Multinational Financial Management, 17(3), 231-243.
Woo, Kai-Yin, Chulin Mai, Michael McAleer, and Wing-Keung Wong. (2020). "Review on Efficiency and Anomalies in Stock Markets" Economies, 8 (1), 20. https://doi.org/10.3390/economies8010020.
Xiao, D., Wang, J., & Niu, H. (2016). Volatility analysis of financial agent-based market dynamics from stochastic contact system. Computational Economics, 48(4), 607-625.
Ya‘Cob, N., & Ya’cob, M. (2016). The Determinants of Stock Market Volatility: Macroeconomic Fundamentals and Investor Sentiment. Doctoral Dissertation, University Of Malaya, Malaysia. 1-234.
Yang, Y., & Copeland, L. (2014). The effects of sentiment on market return and volatility and the cross-sectional risk premium of sentiment-affected volatility (No. E2014/12). Cardiff economics working papers.
Quarterly Journal of Securities Exchange
Volume 15, Issue 60
Winter 2023
Pages 325-350