Measuring the Effect of Noise Trading on price volatility in Tehran Stock Exchange

Noise traders are traders who make decisions based on market sentiment, and in the behavioral financial literature, more volatility may indicate more noise traders in the market and less willing or ability of rational traders to neutralize their effects.The present study analyzes and evaluates the relationship between noise traders and volatilities in the price index of Tehran Stock Exchange. This research is practical and quantitative. In this study, first, the sentiment index is extracted by EMSI method to explain the behavior of noise traders. Then, to model and derive the volatilities of the price index of Tehran Stock Exchange and control variables, the EGARCH model is used, and in the last step to measure the effect of traders' optimistic and pessimistic sentiment on the volatility of the stock price index, the ordinary least squares method ( OLS) or generalized (GLS) is applied. The results show that the effect of optimistic and pessimistic sentiment on stock market volatilities are negative and positive, respectively, and both are significant. The value of the coefficients also indicates the intensity of the small effect of optimistic and pessimistic sentiment on the stock market volatility.