Reference Points, Stock Price and Trading Volume: Evidences from Tehran Stock Exchange

Prospect theory and reference point are the main issues of behavioral finance which describe the situation of the investors in time of decision making. According to prospect theory, loss has more severe psychological effect in compare with the same amount of gain. Empirical evidences suggest that the investors consider some points as reference points in their trading decisions. This means that they postpone their selling orders if the price is lower than the reference point, therefore the trading volume reduces, and they sell the stocks if the price is above the reference point which causes the trading volume increase. Considered reference points in researches are the high and low prices in a year ago and cost of buy positions. In this paper, for finding reference points, the relationship between these points and the trading volume has been examined. This research has been done by panel technique containing week observation of 21729 firms. The results show that trading volume increases as the price goes higher than the maximum price in the last year. But there will be no significant change in trading volume as the price goes lower than the cost of buying and minimum price of a year ago. Therefore, this paper suggests that the maximum price of a year ago is an investors’ reference point in TSE.