The Impact of Investor Sentiment on the Size of Price Bubbles in the Tehran Stock Exchange

Articles in Press

Document Type : Research Paper

Authors

1 Assistant Professor of Department of Financial Management, Shahid Beheshti University, G.C., Evin, Tehran,19839, Iran

2 Assistant Professor/faculty of management and accounting/shahid beheshti university/tehran/iran

3 Department of Financial Management, Faculty of Management and Accounting, Shahid Beheshti University

Abstract

This study investigates the impact of investor sentiment on the size of price bubbles in both the overall and equal‑weighted indices of the Tehran Stock Exchange over the period 2011–2021, with the objective of enhancing the understanding and potential control of bubble phenomena in financial markets. Price bubbles were identified using the Supremum Generalized Dickey–Fuller (GSADF) test, while their origination and collapse dates were determined through the backward SADF (BSADF) procedure. Investor sentiment was measured by the Equity Market Sentiment Index (EMSI), and bubble size was proxied by the price‑to‑dividend (P/D) ratio. To assess the dynamic effects of sentiment, a Vector Autoregression (VAR) framework combined with impulse–response analysis was employed. The results reveal that sentiment shocks exert a positive and significant effect on bubble size in the overall index, indicating that heightened investor optimism intensifies bubble expansion. Conversely, sentiment shocks negatively affect the size of bubbles in the equal‑weighted index, suggesting that increased positive sentiment may mitigate bubble growth in markets with less concentration. These findings underscore the heterogeneous role of investor sentiment across different market structures and highlight its potential relevance for monitoring and managing price bubbles.

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Journal of Asset Management and Financing

Articles in Press, Accepted Manuscript
Available Online from 09 June 2026

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