Analysis of the Behavior of Amateur and Professional Investors’ Impact on the Formation of Bubbles in Tehran Stock Market

Document Type : Research Paper


1 Assistant Professor of Economics, University of Kharazmi, Tehran, Iran

2 MSc Student of Economic and Social Systems, University of Kharazmi, Economic Department, Tehran, Iran


The presence of bubbles in the markets and its formation has been regarded by economists and they have been looking to develop methods that can be recognized by using appropriate method for the formation of bubbles. In this paper, first, the formation of bubbles is tested using the new unit root test known as Phillips test (Generalized Sup ADF test) for 50 companies in the Tehran Stock Exchange during the period of August 2011 to March 2013, and periods of bubble is shown by one and zero if otherwise. Then, the behavior of amateur and professional investors’ impact on the probability of the formation of speculative bubbles in the Tehran Stock is investigated and estimated using Panel Data Models for Binary Choice (Logit) model. Phillips test shows that 49 companies from 50 samples of Tehran Stock Exchange at different periods of time have experienced price bubbles. The results of the Panel Logit regression model indicate that the impact of trading amateur investors on the probability of the formation of speculative bubbles is different from the behavior of institutional or professional investors. That purchase and sale of amateur investors, with respect to trading of professional investors, increases the probability of bubble formation and it can be one of the main factors affecting the formation of bubbles in the stock market. Also, the results show that the P/E ratio and speed of turnover also increases the formation of bubbles, while company size as an index scale enterprises, leading to decline the possibility of a bubble in the stock market. 


  1. Babai Semiromi, M.R. (2005), the presence of rational inflationary bubbles: Case Study of Iran, MSc thesis, Faculty of Economic and Administrative Sciences, University of Mazandaran.(in Persian)
  2. Beltratti, A and Morana, C. (2006), Breaks and Persistency: Macroeconomic Causes of Stock Market Volatility, Journal of Econometrics, Vol. 131, No. 2: 151-177.
  3. Blanchard. O and M Watson (1982), Bubbles, Rational Expectations and Financial Markets, in P Wachtel (ed). Crises in the economic and financial structure, D.C. Heath. Lexington.
  4. Campbell, J. Y, Shiller R. J. (1987), Cointegration and Tests of Present Value Models, Journal of Political Economy. University of Chicago press. vol.95 (5). PP.1062-1088.
  5. Christophe, B. (2003), Testing for Rational Bubbles with on Time Varying Risk Premium and Non- Linear Cointegration: Evidence from the USA and French Stock Markets; University Paris Nord. CEPN, France, Version.
  6. Engsted, T., Tanggard, C. (2001), A New Test for Speculative Bubbles Based Return Variance Decompositions, Department of Finance, the Arhus School of Business Denmark Publication.
  7. Eshgi, M. (2006), the presence of bubbles in stock prices of companies in Tehran stock exchange, MSc thesis, University of Imam Sadeq. (in Persian)
  8. Ferguson, N. (2008), The Ascent of Money, Penguin Press, New York.
  9. Godard, A. (2006), the existence of a price bubble in the Tehran Stock Exchange during 2004-2005, MSc Thesis, University of Tarbiat Modarres. (in Persian)
    1. Jiang, Z.-Q., Zhou, W.-X., Sornette, D., Woodard, R., Bastiaensen, K., Cauwels, P., (2010), Bubble diagnosis and prediction of the 2005–2007 and 2008–2009 Chinese stock market bubbles, Journal of Economic Behavior and Organization74, 149–162.
    2. Lamont, O. (1998), Earnings and Expected returns, Journal of Finance, 53.PP 1563-1587.
    3. Larsen, E. S. (1997), Theories and Tests for Bubbles; Working Papers of Universitetet i Tromso. PP. 17-19.
    4. Lin, L., Ren, R.-E., Sornette, D. (2009), A consistent model of explosive financial bubbles with mean-reversing residuals, Swiss Finance Institute, arXiv: 0905.0128,
    5. Madlt, K. (2002), Study of price bubble in the Tehran Stock Exchange in recent years, Journal of Economic Studies, No. 20, pp. 1-24. (in Persian)
    6. Nazes & D.Silva (2007), Rational Bubbles in Emerging Stock Markets, MPRA Paper; 4641:1-10.
    7. Pele, D. T., Mazurencu-Marinescu, M., (2012), Modeling stock market crashes: the case of Bucharest Stock Exchange, Procedia - Social and Behavioral Sciences58, 533 – 542.
    8. Phillips, P.C.B., Shi, S., and Yu, J., (2011), Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior. Working Paper, Sim Kee Boon Institute for Financial Economics, Singapore Management University.
    9. Phillips, P.C.B., Wu, Y., and Yu, J., (2011), Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values?, International Economic Review, 52, 201-226.
    10. Phillips, P. C., Shi, S. P., & Yu, J. (2012), Testing for Multiple Bubbles, Working Papers, Singapore Management University, School of Economics.
    11. Saleh Abadi, A. and Dlyryan, H., (2010), Study of price bubble in the Tehran Stock Exchange, Journal of Stock Exchange, No. 9. (in Persian)
    12. Shiller, Robert J (1978), Rational Expectations and the Dynamic Structure of Macro Models, Journal of Monetary Economics, IV (1978), 1-44.
    13. Soltani, A. (2007), the stock price bubbles in the Tehran Stock Exchange during 1991-2005, PhD thesis, University of Shahid Beheshti. (in Persian)
    14. Turky, L and Vaez, M. (2008), Price bubbles and the stock market of Iran, Journal of Isfahan University Research, Vol. 31, No. 3, and pp.195 207. (in Persian)
    15. White, E. N. (2004), Bubbles and Busts: The 1990s in The Mirror of The 1920s; Finance research Unit, Institute of Economics, University of Copenhange.