Investigation of the relationship between investor sentiment and stock market indices

Behavioral finance theory is based on the idea that people are influenced by emotional and cognitive processes in their decision-making, in accordance with the Prospect Theory instead of the rational investor in the traditional financial understanding based on the Expected Utility Theory. The effects of investors on share prices, which are irrational, and noise driven, are tried to be measured through the concept of investor sentiment. In this study, a sentiment index was constructed by using variables reflecting investor sentiment for Turkey. This index was obtained by analysis of principal components over nine variables, which are proxies of investor sentiment. In the application section of the study, the existence and direction of the volatility spillover between BIST indices and the Sentiment Index were investigated. The examination of the causality relationship between BIST indices and Sentiment Index were conducted with Hafner and Herwartz (2006) Variance Causality Test for the period 2008: 1 - 2019: 12. The findings have shown that the volatility of the Sentiment Index is the reason for the volatility of ten of the twenty indices within the scope of the research. It has been found that there is no volatility spillover effect from stock market indices towards investor sentiment. Keywords: Behavioral Finance, Borsa İstanbul, Investor Sentiment, Noise Trading, Causality at Variance.