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

Aghababaei, Mohammad Ebrahim; Karimzdeh Khosroshahi, Mahya; Madani, Saeid

doi:10.22059/ier.2024.372795.1007942

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

Document Type : Research Paper

Authors

Mohammad Ebrahim Aghababaei

Mahya Karimzdeh Khosroshahi

Saeid Madani

Department of Financial Management and Financial Engineering, 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 over bank deposit interest rates (as the risk-free rate) 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 on 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 overall, the market sentiment index does not have a significant impact on the excess returns of stock investment portfolios. 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 the excess returns of stock portfolios varies across different portfolios.

Keywords

economic policy uncertainty

excess returns

market sentiment

Subjects

Capital Market

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