Investor sentiment and mean-variance relationship in Tehran Stock Exchange

Although a positive mean-variance relation is a cornerstone of traditional finance theory, empirical evidence supporting it is controversial and mixed. According to behavioral finance theory, the mixed risk-return tradeoffs attributes to investor sentiment in the financial market. In this paper, we investigated the effect of individual investor sentiment on the mean-variance relationship in 103 Tehran Stock Exchange firms using the BSI index. Meanwhile, we examined the relationship between small and large companies, high and low-priced firms, and growth and value stocks. The conditional volatility of stocks was calculated with GARCH models, and the research hypotheses were examined using a panel data method. The results show that the risk-return relationship in the total sample, growth stocks, and high-priced entities are less affected by sentiments, but sentiments strengthen the positive mean-variance relation in value stocks, low capitalization, and low-priced firms. However, sentiment does weaken the positive relation in high-capitalization firms. According to the research results, in constructing portfolios based on variance, investors should consider not only the sentiment of investors but also the features of the share in terms of value and growth, the market value of the company, and the stock price of the companies.