Investor sentiment in behavioral finance: An application on Borsa Istanbul

Determining the factors influencing stock return has always been a topic of interest, and many models, such as CAPM, Arbitrage Pricing Model, and Macroeconomic Factor Model, have been developed to address this issue. However, these models, which use different parameters from each other, could not fully explain the factors affecting stock returns. Studies conducted after these models were carried out with the thought that investor psychology may have a role in stock prices. In this study, to understand the effect of investor sentiment on stock returns, a multiple regression model was established with the investor sentiment representatives determined first. Since the result of this model is not explanatory, the "Investor Sentiment Index" was created with the help of Principal Components Analysis and explained chronologically. Granger Causality Analysis was applied to stock returns with the created Investor Sentiment Index. As a result of the Granger Causality Analysis applied, it has been observed that there is a causality relationship from stock returns to the Investor Sentiment Index.