The Effect of Investor Sentiment on the Formation of Bubbles in the Stock Market

The main purpose of this study is to investigate the effects of investor sentiment on bubble formation in the stock market. This study aims to find a significant relationship between investors' sentiments and the creation and explosion of the bubble in the Tehran stock exchange. For this purpose, daily index data is used as well as investor sentiment index for the 2009 - 2019 period. By using Dicky – Fuller test, we identify bubbles in the Tehran stock market and calculate the indicator of investor sentiment. Afterwards, we study the relationship between investor sentiment and bubble formation by using Logistic regression. According to the research findings, the hypothesis of the influence of investor's feelings in the capital market on the formation of the financial bubble is rejected.Also according to the results of logistic regression and probit regression, The probability value of the variable EMSI (Equity Market Sentiment Index) at conventional statistical levels is meaningless. Further, the author observes that, Investor's sentiment have no effect on the formation of a bubble in the Stock market.