Modeling the Effects of Volatility and Uncertainty in Psychological Errors on Collective Decision-Making of Investors in the Iranian Capital Market

Abstract

Objective: The aim of the present study is to model the effects of volatility and uncertainty in psychological errors on the collective decision-making of investors in the Iranian capital market. Methodology: To test the hypotheses, a sample consisting of 204 companies from those listed on the Tehran Stock Exchange was selected using the systematic elimination method over a 5-year period from 2018 to 2022. The research data were collected on a monthly basis with a panel data approach and were analyzed using three multiple linear regression models. These models were calculated using the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) and Threshold Generalized Autoregressive Conditional Heteroskedasticity (TGARCH) methods, with the help of Excel 2016 and Eviews13 software for statistical analysis. Findings: According to the results of the statistical tests of the research hypotheses, the volatility of the psychological error index and investors' trading behavior has a significant and negative impact on abnormal stock returns. Additionally, the volatility of the psychological error index has a significant and positive impact on the volume and frequency of abnormal stock trades. However, the volatility of investors' trading behavior has a significant and negative impact on the volume and frequency of abnormal stock trades. Conclusion: The results of the analysis of the EGARCH and TGARCH conditional heteroskedasticity models indicate asymmetry in the influence of collective investment decisions from past data and past volatility, which is consistent with the Prospect Theory that claims positive and negative returns have different effects on investor utility.