Economy, Business And Markets

Psychoeconomic Behavior of TSE Players

Post-Doc and Teaching Fellow at Alzahra University
Psychoeconomic Behavior of TSE Players Psychoeconomic Behavior of TSE Players

Capital market experts express concerns over the poor state of Tehran Stock Exchange, even after the government unveiled the stimulus package.

TSE’s lackluster performance is partly attributed to lack of confidence in the government’s economic decisions. However, given the similar reaction of the market to the nuclear agreement and its approval, it seems that the TSE has been overshadowed by the psychoeconomic behavior of market players.

The government’s stimulus package—aimed at increasing liquidity and lowering interest rates—was expected to help boost the stock market’s floor prices. However, at the time of downtrend, there is no incentive for unprofessional traders to enter the market.

Casual traders who do not follow a clear strategy tend remain inactive and get along with lows, as they want to compensate their losses. At this time, only players with clear trade strategy remain active in the market. Hence, if we assume a majority of market players are following technical analyses, we can better understand the TSE performance.

The general belief is that stock prices are true signals, as they respond to information and reveal market efficiency. Hence, when prices don’t respond to news, experts start to explain the situation. The explanation ranges from questioning the efficiency of market to ignoring the controversy. The reality, however, lies somewhere in between.

While in academia the idea of market efficiency has been challenged, successful traders welcome the debate but believe markets still act rationally in the sense that people react emotionally in patterns that are predictable. In other words, there is rationality in their emotionalism.

It seems players in the TSE market are responding to other people’s perception of news rather than the news itself. Hence, it is not the fundamental data that matter, it is how the market perceives the information and the market consists of many individuals. So, it is how these individuals perceive and react to the information.

Of course, an individual’s perception depends on fundamental variables and the general ambiance of the economy. Nevertheless, human nature does not change and people tend to react in the same way over and over again.

The below graph indicates the TEDPIX (TSE’s main index) trend from the beginning of the Iranian fiscal year (started March 21).

The first jump, marked by a red vertical line, is the day Iran and P5+1 reached a breakthrough by signing the nuclear framework agreement in Lausanne, Switzerland. The second peak is reached on 14 July when the Joint Comprehensive Plan of Action was signed. The third red line shows the reaction of market to the stimulus package.  

The TSE reacted the least to the package by experiencing a nearly 1.33% increase in TEDPIX and getting back at 63,000-level point after a month. Although the market reaction subsided quickly, the reaction was better than expected.

As long as there is no realization of improvement in the performance of listed companies, the market reaction to “good” news will be of similar magnitude due to the prolonged downtrend and the previous market reactions.