Investor Sentiment Index and Capital Asset Pricing

The traditional view of stock returns suggests that stock prices will change due to systemic changes in the company's fundamental value; but recent research has shown that investor sentiment play an important role in determining prices. The purpose of this study was to investigate the effect of the investor's sentiment index created by the Principle component analysis method on the Fama and French three-factor model; for this purpose, were investigated 77 companies listed in Tehran Stock Exchange during the monthly period from 2009 to 2014. In order to test the hypothesis were use the multivariate regression analysis and combination data method in Eviews 9 software. The findings of this paper show that the effect of the investor's sentiment index on the excess return in all portfolios level is positive and significant; also, the effect of this factor on the excess return in the portfolio of smaller companies is greater than the stocks of the large size companies’ portfolio. Therefore the results are consistent with the literature and show the investor's sentiment has a significant effect beyond the Fama and French (1993) model, and supports the role of investor sentiment in the price formation and surplus returns. These findings are robust when subjected to a series of sensitivity tests.