Investigating the Impact of Investor Sentiment and Liquidity on Stock Returns of the Iranian Stock Exchange

Abstract

Objective: This study investigates the impact of optimistic investor sentiment and stock liquidity on the stock returns of the Iranian stock exchange. The primary objective is to analyze how psychological and financial factors influence stock market performance. Methodology: The research utilizes monthly data on stock returns, investor sentiment, and liquidity from April 2013 to June 2022. Two methods, Dynamic Ordinary Least Squares (DOLS) and Robust Least Squares (RLS), were employed for data analysis. These methods allow researchers to precisely examine the longitudinal and robust relationships between the variables. Findings: The results indicate that optimistic investor sentiment has a positive and significant effect on stock returns, while illiquidity has a negative and significant impact on stock returns. These findings underscore the importance of managing market-related information and news to channel investor sentiment positively. Conclusion: The results of this study suggest that proper management of investor sentiment and increased liquidity can improve stock returns and stabilize financial markets. It is recommended that stock market regulators and economic policymakers utilize these findings to enhance stock market performance through appropriate policy-making and implementation. Additionally, directing liquidity from parallel markets to the stock market can help control inflation and reduce price volatility.