The effect of investor sentiment on derivatives market returns: An empirical research on stock index futures

Globalization of financial markets, accelerated financial integration process, developments in computer technology and electronic commerce in recent years, have led investors to depend on financial derivative products, in order to avoid market risks. Turkish derivatives markets has been effectively active since February 2005. Having such a young market with a trading volume of 2 billion TL and 90 million contracts per year as of the end of 2015, would indicate the rapid development of the derivatives market in Turkey. Despite all of these positive developments, financial markets in general, seems to depart from the efficiency that has been first presented by Fama (1970). Efficient Market Hypotheses, one of the main hypotheses of the classical finance theories, cannot not fully explain the asset returns, so investor sentiment theory that is one of the most important theories of behavioral finance, is trying to explain the fluctuations of asset returns and the divergence from fundamental values. Empirical studies on investor sentiment, which is stemming from the presence of investors who are not trading on fundamental information, have shown that sentiment in the markets affects asset prices, so that the returns would fluctuate at certain times and that investors who are holding this information, would benefit from abnormal returns on financial markets. Therefore, investigating the effect of investor sentiment on Turkish derivatives market is crucial in terms of clarifying whether sentiment is systematically affecting the stock index futures contracts' returns, as well as the price movements of those contracts. This study aims to investigate whether investor sentiment affects index futures contracts traded on the Turkish Derivatives Market between April 2006 and April 2016. Classical linear regression analysis and the least squares estimation method is used in the analysis. The dependent variable of the study is futures market return proxied by BIST 30 Index futures contracts' returns, while the three independent variables are the sentiment index, the change in the speculation ratio and the volatility of the returns of BIST 30 Index Futures Contracts to proxy investor sentiment. All of the three independent variables are found to be statistically significant. It is also seen that BIST 30 index futures contracts' returns are affected by sentiment index in the same direction, while speculation ratio and volatility have negative affects on returns. When all results combined together it can be referred that sentiment index and other two sentiment proxies seems to measure the sentiment in opposite ways. The findings of the study would be expected to provide an insight to investors who are trading on futures markets and also to the regulative authority who are making legislations and regulations in a more effective way. Keywords: Derivatives markets, futures market, stock index futures, investor sentiment, classical linear regression analysis