The Role of Market Sentiment and Economic Policy Uncertainty on the Excess Returns of Stock Portfolios: Evidence from Iran

Articles in Press

Document Type : Research Paper

Authors

1 Department of Financial Management and Financial Engineering, Faculty of Finance Sciences, Kharazmi University, Tehran, Iran.

2 Department of Financial Management, Faculty of Finance Sciences, Kharazmi University, Tehran, Iran

3 Department of Financial Management, Faculty of Finance Sciences, Kharazmi University, Tehran, Iran.

10.22059/ier.2024.372795.1007942

Abstract

The market sentiment and economic policy uncertainty in the capital market can have a significant impact on stock returns. Investors expect to achieve excess returns compared to bank deposit interest rates (as risk-free rates) by investing in the stock market and accepting risks. Therefore, this study examines the relationship between market sentiment, economic policy uncertainty, and excess returns of investment portfolios in the Tehran Stock Exchange. To calculate the economic policy uncertainty and market sentiment index (based on the proposed composite index by Baker and Wurgler, 2006), the study employs principal component analysis (PCA) using the five-factor Fama-French variables along with the momentum factor. The research findings indicate that in total, the market sentiment index does not have a significant impact on the excess returns of investment portfolios in stocks. However, economic policy uncertainty has a positive and significant effect on excess returns. Furthermore, the study findings demonstrate that the impact of market sentiment and economic policy uncertainty on excess returns of stock portfolios varies across different stock portfolios.

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Main Subjects

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 19 May 2024

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