Analyzing the effect of investor sentiment on risk and return in financial markets

In this study, after examining the concepts of market efficiency, behavioral finance and investor sentiment, the effect of investor sentiment on the rate of return and risk in Borsa Istanbul was investigated. In the research covering the period of 04.01.2010-06.05.2021, we derived an investor sentiment measure by using the discount index of 10 closed end investment trust companies which are traded in this period. Then we tested the relation between the investor sentiment and the risks and returns of the indeces of BIST100, BIST30, BIST All, BIST Financial, BIST Industry, BIST Services, BIST Transportation and BIST Technology. The findings show that there are statistically significant and positive relationships between investor sentiment and all index returns as well as risks which are measured by conditional variances derived from the GARCH models.