Investigating the Relationship Among Investors' Sentiments, ‎Monetary Policies and Tehran Stock Exchange Returns

Document Type : Research Article

Authors

1 Ph.D. Candidate in Islamic Economics, Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran

2 Assistant Professor, Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran

3 Associate Professor, Department of Economics, Institute of Economic Affairs, Tehran, Iran

4 Associate Professor, Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran

Abstract

A central question in finance concerns the extent to which stock-market performance is shaped by behavioral forces versus macroeconomic fundamentals. While a strand of the literature argues that investor emotions exert limited influence on market outcomes—and that macroeconomic drivers, particularly liquidity and cash-flow conditions, primarily explain stock-index dynamics—behavioral finance emphasizes that investor sentiment can meaningfully affect prices and contribute to market cycles through mechanisms such as herding. To contribute to this debate, the present study examines the dynamic linkages among investor sentiment, liquidity growth as a monetary/financial condition, and stock-market returns in the Tehran Stock Exchange using a Markov-Switching Vector Autoregression (MS-VAR) model. The analysis employs quarterly data over the Iranian calendar years 2010–2023. The results indicate clear regime dependence. In periods characterized by optimism and strong real liquidity growth, the market is generally in an expansionary state. In this regime, higher real liquidity growth is associated with higher stock-market returns. At the same time, however, elevated positive sentiment may be accompanied by lower realized returns, consistent with herd-driven price pressures that can detach valuations from fundamentals and increase the likelihood of subsequent corrections. By contrast, during pessimistic regimes, negative sentiment is associated with weaker stock-market returns and a higher likelihood that the market remains in a stagnation (recessionary) state. Overall, the findings underscore that stock-market responses to liquidity conditions are asymmetric across sentiment regimes, and that psychological factors can either amplify booms or prolong downturns.

Keywords

Main Subjects

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Economic Policies and Research
Volume 4, Issue 4 - Serial Number 16
December 2025
Pages 33-60

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History

  • Receive Date: 12 October 2024
  • Revise Date: 07 March 2025
  • Accept Date: 09 March 2025
  • Publish Date: 22 December 2025

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