Sentiment Shock and Stock Price Bubbles in a Dynamic Stochastic General Equilibrium Model Framework: The Case of Iran

Document Type: Research Paper

Authors

1 Department of Economics, Faculty of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran.

2 Department of Economics, Faculty of Economics and Management, Shiraz Branch, Islamic Azad University, Shiraz, Iran

Abstract

In this study, a model of Bayesian Dynamic Stochastic General Equilibrium (DSGE) from Real Business Cycles (RBC) approach with the aim of identifying the factors shaping price bubbles of Tehran Stock Exchange (TSE) was specified. The above-mentioned model was conducted in two scenarios. In the first scenario, the baseline model with sentiment shock was examined. In this model, stock price bubbles appear endogenously in a positive feedback mechanism that is supported by people optimism. In the second scenario, only sentiment shock is absent from the model. According to the results obtained from the estimation of marginal likelihood model based on Laplace approximation, the baseline model is more in accord with Iran’s economic structure and real data. Consequently, the sentiment shock had a dominant role in creating stock price fluctuations and macroeconomic variables. Based on the results of variance decomposition model, sentiment shock was also recognized as the most important source of fluctuations in bubbles and subsequent fluctuations in stock prices. This shock reflected households’ beliefs about the approximate size of previous bubbles over the recent ones and was passed to the macroeconomic by credit constraints. In this way, this shock also described a major part of the fluctuation of consumption and output. Sentiment shock explained about 86% of stock price fluctuations, 47% of consumption fluctuations, and 39% of output fluctuations.

Keywords


Article Title [Persian]

تکانه احساسی و حباب های قیمت سهام در چارچوب الگوی تعادل عمومی پویای تصادفی: مطالعه موردی ایران

Authors [Persian]

  • احسان اسدی 1
  • هاشم زارع 2
  • مهرزاد ابراهیمی 2
  • خسرو پیرایی 1
1 گروه اقتصاد، دانشکده اقتصاد و مدیریت، واحد شیراز، دانشگاه آزاد اسلامی، شیراز، ایران
2 گروه اقتصاد، دانشکده اقتصاد و مدیریت، واحد شیراز، دانشگاه آزاد اسلامی، شیراز، ایران
Abstract [Persian]

در این مقاله یک الگوی DSGE بیزین از سیکل‌های تجاری حقیقی با هدف شناسایی عوامل شکل دهنده حباب قیمتی بازار سهام تهران تصریح شده است. الگوی مذکور در 2 سناریو انجام شده است: در سناریو اول مدل پایه‌ای تحقیق با وجود شوک احساسی بررسی می‌شود. در سناریو دوم تنها شوک احساسی در مدل حضور ندارد. بر اساس نتایج حاصل شده از براورد درستنمایی نهایی مدل بر اساس تقریب لاپلاس، مدل پایه‌ای با داده‌های واقعی و ساختار اقتصاد ایران سازگارتر است، لذا شوک احساسی در ایجاد نوسان در قیمت سهام و متغیرهای اقتصاد کلان ایران نقش مهمی داشته است. بر اساس نتایج تجزیه واریانس مدل نیز شوک احساسی به عنوان مهمترین منبع نوسانات حباب و به دنبال آن نوسانات قیمت سهام معرفی شده است. این شوک انعکاس دهنده باورهای خانوارها در مورد اندازه نسبی حباب قدیمی نسبت به حباب جدید می‌باشد و از طریق محدودیت-های اعتباری به اقتصاد واقعی انتقال می‌یابد. به این ترتیب این شوک بخش عمده‌ای از نوسانات مصرف و محصول را نیز بیان می‌کند. شوک احساسی حدود 86 درصد از نوسانات قیمت سهام، 47 درصد از نوسانات مصرف و 39 درصد از نوسانات محصول را توضیح می‌دهد.

Keywords [Persian]

  • حباب قیمتی بازار سهام
  • الگوسازی DSGE
  • تکانه احساسی
  • ادوار تجاری حقیقی
  • ایران
References

 Abbasian, E., Farzanegan, E., & Nasiroleslami, E. (2016). Price bubble anomalies in Tehran stock exchange: Limits to arbitrage approach. Quarterly Journal of Economic Research and Policies, 23(76), 75-92.

Abbasian, E., Mahmoudi, V., & Farzanegan, E. (2010). Bubble identification in Tehran's stock exchange: Evidence based on time-varying present value model. Journal of Accounting and Auditing Review, 17(2), 75-92.

Amini, A. R., & Haji Mohammad, N. (2005). Estimation of time series of the capital stock in Iran’s economy during 1967-2002. The Journal of Planning and Budgeting, 10(1), 53-86.

Asadi, G. H., Hamidi Zadeh, M. R., & Soltani, A. (2006). A survey of stock price bubbles in Tehran stock exchange on the basis of size and type of industries. Empirical Studies in Financial Accounting Quarterly, 4(14), 39-71.

Balcilar, M., Gupta, R., Jooste, C., & Wohar, M. (2016). Periodically collapsing bubbles in the South African stock market. Research in International Business and Finance, 38, 191-201.

Bashiri, S., Pahlavani, M., & Boostani, R. (2016). Stock market fluctuations and monetary policy in Iran. Journal of Economic Modeling Research, 6(23), 103-157.

Bayat, M., Afshari, Z., & Tavakolian, H. (2016). Monetary policy and stock price index in DSGE models framework. Quarterly Journal of Economic Research and Policies, 24(78), 171-206.

Beaudry, P., & Portier, F. (2006). Stock price, news, and economic fluctuations. American Economic Review, 96(4), 1293-1307.

Beltratti, A., & Morana, C. (2006). Breaks and persistency: Macroeconomic causes of stock market volatility. Journal of Econometrics, 131(1-2), 151-177.

Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). Financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics, 1, 1341-1393.

Blanchard, O., & Watson, M. (1982). Bubbles, rational expectations and financial markets. Harvard Institute of Economic Research, Working Paper No 945.

Boone, L., Giorno, C., & Richardson, P.(1998). Stock market fluctuations and consumption behavior. OECD Economics Department Working Papers.

Carlstrom, C. T., & Fuerst, T. S. (1997). Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. American Economic Review, 87, 893-910.

Central bank of the Islamic Republic of Iran (www.cbi.ir).

Chaney, T., Sraer, D., & Thesmar, D. (2012). The collateral channel: How real estate shocks affect corporate investment. American Economic Review, 102(6), 2381-2409.

Einian, M., & Barakchian, S. M. (2014). Measuring and dating business cycles in the Iranian economy. Journal of Monetary and Banking Researches, 7(20), 161-194.

Fallah Shams, M. F., & Zare, A. (2013). The effective factors in the price bubble in Tehran stock market. Quarterly Journal of Securities Exchange, 6(21), 73-91.

Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis, Working Paper, NYU.

Gilchrist, S., Himmelberg, C., & Haberman, G. (2005). Do stock price bubbles influence corporate investment? Journal of Monetary Economics, 54(2), 805-827.

Goyal, V. K., & Yamada, T. (2004). Asset price shocks, financial constraints, and investment: Evidence from Japan. Journal of Business, 77(1), 175-199.

Greenwood, J., Hercowitz, Z., & Krusell, P. (1997). Long-run implications of investment-specific technological change. American Economic Review, 87, 342-362.

Gurkaynak, R. S. (2008). Econometric test of asset price bubbles: Taking stock. Journal of Economic Surveys, 22(1), 166-186.

Hayashi, F. (1982). Tobin's marginal q and average q: A neoclassical interpretation. Econometrica, 50, 213-224.

Hou, H., & Cheng, S. Y. (2017). The dynamic effects of banking, life insurance, and stock markets on economic growth.Japan and the World Economy,41, 87–98.

Hui, C. S. (2010). Investor mood and financial markets. Journal of Economic Behavior and Organization, 76(2), 267-282.

Ikeda, D. (2013). Monetary policy and inflation dynamics in asset price bubbles. Bank of Japan Working Paper Series, No.13-E-4.

Jermann, U., & Quadrini, V. (2012). Macroeconomic effects of financial shocks. American Economic Review, 102(1), 238-271.

Kahenman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.

Kiyotaki, N., & Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2), 211-248.

Lamont, O. (1998). Earning and expected returns. Journal of Finance, 53(2), 1563-1587.

Lee, I. (1993). On the convergence of informational cascades. Journal of Economic Theory, 61(2), 396-411.

Liu, Z., Wang, P., & Zha, T. (2011). Land price dynamics and macroeconomic fluctuations. NBER Working Papers, No. w17045.

Manzoor, D., & Taghipour, A. (2016). A dynamic stochastic general equilibrium model for an oil exporting and small open economy: The case of Iran. Quarterly Journal of Economic Research and Policies, 23(75), 7-44.

Martin, A., & Ventura, J. (2012). Economic growth with bubbles. American Economic Review, 102(6), 3033-3058.

Miao, J. (2014). Introduction to economic theory of bubbles. Journal of Mathematical Economics, 53, 130-136.

Miao, J., & Wang, P. (2011). Bubbles and credit constraints. Working Paper, Boston University and HKUST.

Miao, J., Wang, P., & Xu, Z. (2012). A Bayesian DSGE model of stock market bubbles and business cycles. Working Paper, Boston University.

Miao, J., Wang, P., & Xu, Z. (2015). A Bayesian dynamic stochastic general equilibrium model of stock market bubbles and business cycles. Quantitative Economics, 6(3), 559-635.

Modigliani, F. (1986). Life cycle, individual thrift, and the wealth of nations. Science, 234(4777), 704-712.

Musai, M., Mehregan, N., & Amiri, H. (2010). Stock market and macroeconomic variables: A case study for Iran. QuarterlyJournal of Economic Research and Policies, 18(54), 73-94.

Nazes, D., & Silva, D. (2007). Rational bubbles in emerging stock markets. MPRA Paper, 4641, 1-10.

Paetz, M., & Gupta, R. (2016). Stock price dynamics and the business cycle in an estimated DSGE model for South Africa. Journal of International Financial Markets, Institutions and Money, 44, 166-182.

Payandeh Najafabadi, A. T., Qazvini, M., & Ofoghi, R. (2012). The impact of oil and gold prices’ shock on Tehran stock exchange: A copula approach. Iranian Journal of Economic Studies, 1(2), 23-47.

Salehabadi, A., & Dalirian, H. (2010). Testing the existence of price bubble in Tehran stock market. Quarterly Journal of Securities Exchange, 3(9), 61-75.

Salmani Bishak, M. R., Barghi Oskooee, M. M., & Lak, S. (2016). The effects of monetary and fiscal policy shocks on stock market of Iran. Journal of Economic Modeling Research, 6(22), 93-131.

Samadi, S., Vaez Barzani, M., & Ghasemi, M. R. (2010). The behavioral analysis of the formation price bubbles in capital market (case study: Tehran stock market 1997-2009). Economics Research, 10(3), 273-297.

Senhadji, A. S., & Collyns, C. (2002). Lending booms, real estate bubbles, and the Asian crisis (No. 02/20). International Monetary Fund.

Seven, U., & Yetkiner, H. (2016). Financial intermediation and economic growth: Does income matter? Economic Systems, 40(1), 39–58.

Shahmoradi, A. (2008). The effects of energy price changes on the price level, production, and welfare in Iran’s economy. The Ministry of Economic Affairs and Finance.

Shahmoradi, A., & Ebrahimi, E. (2010). The impact of monetary policies in Iran: A DSGE approach. Journal of Monetary and Banking Researches, 2(3), 31-56.

Shiller, R.J. (1981). Does stock price move too much to be justified by subsequent changes in dividends? American Economic Review, 71, 421-436.

Smets, F., & Wouters, R. (2003). An estimated stochastic dynamic general equilibrium model of the Euro area. Journal of the European Economic Association, 1(5), 1123–1175.

Smets, F., & Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review, 97(3), 586-606.

Tirole, J. (1982). On the possibility of speculation under rational expectations. Econometrica, 50, 1163-1181.

Uhlig, H. (1999). A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily in Computational Methods for The Study of Dynamic Economies. Oxford University Press.

Vaez, M., & Torki, L. (2008). Price bubbles and capital market in Iran. Quarterly Research Bulletin of Isfahan University (Humanities), 31(3), 195-207.

Zagaglia, P. (2009). Forecasting with a DSGE model of the term structure of interest rates: The role of the feedback. Central Bank of Sweden

References

 

Abbasian, E., Farzanegan, E., & Nasiroleslami, E. (2016). Price bubble anomalies in Tehran stock exchange: Limits to arbitrage approach. Quarterly Journal of Economic Research and Policies, 23(76), 75-92.

Abbasian, E., Mahmoudi, V., & Farzanegan, E. (2010). Bubble identification in Tehran's stock exchange: Evidence based on time-varying present value model. Journal of Accounting and Auditing Review, 17(2), 75-92.

Amini, A. R., & Haji Mohammad, N. (2005). Estimation of time series of the capital stock in Iran’s economy during 1967-2002. The Journal of Planning and Budgeting, 10(1), 53-86.

Asadi, G. H., Hamidi Zadeh, M. R., & Soltani, A. (2006). A survey of stock price bubbles in Tehran stock exchange on the basis of size and type of industries. Empirical Studies in Financial Accounting Quarterly, 4(14), 39-71.

Balcilar, M., Gupta, R., Jooste, C., & Wohar, M. (2016). Periodically collapsing bubbles in the South African stock market. Research in International Business and Finance, 38, 191-201.

Bashiri, S., Pahlavani, M., & Boostani, R. (2016). Stock market fluctuations and monetary policy in Iran. Journal of Economic Modeling Research, 6(23), 103-157.

Bayat, M., Afshari, Z., & Tavakolian, H. (2016). Monetary policy and stock price index in DSGE models framework. Quarterly Journal of Economic Research and Policies, 24(78), 171-206.

Beaudry, P., & Portier, F. (2006). Stock price, news, and economic fluctuations. American Economic Review, 96(4), 1293-1307.

Beltratti, A., & Morana, C. (2006). Breaks and persistency: Macroeconomic causes of stock market volatility. Journal of Econometrics, 131(1-2), 151-177.

Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). Financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics, 1, 1341-1393.

Blanchard, O., & Watson, M. (1982). Bubbles, rational expectations and financial markets. Harvard Institute of Economic Research, Working Paper No 945.

Boone, L., Giorno, C., & Richardson, P.(1998). Stock market fluctuations and consumption behavior. OECD Economics Department Working Papers.

Carlstrom, C. T., & Fuerst, T. S. (1997). Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. American Economic Review, 87, 893-910.

Central bank of the Islamic Republic of Iran (www.cbi.ir).

Chaney, T., Sraer, D., & Thesmar, D. (2012). The collateral channel: How real estate shocks affect corporate investment. American Economic Review, 102(6), 2381-2409.

Einian, M., & Barakchian, S. M. (2014). Measuring and dating business cycles in the Iranian economy. Journal of Monetary and Banking Researches, 7(20), 161-194.

Fallah Shams, M. F., & Zare, A. (2013). The effective factors in the price bubble in Tehran stock market. Quarterly Journal of Securities Exchange, 6(21), 73-91.

Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis, Working Paper, NYU.

Gilchrist, S., Himmelberg, C., & Haberman, G. (2005). Do stock price bubbles influence corporate investment? Journal of Monetary Economics, 54(2), 805-827.

Goyal, V. K., & Yamada, T. (2004). Asset price shocks, financial constraints, and investment: Evidence from Japan. Journal of Business, 77(1), 175-199.

Greenwood, J., Hercowitz, Z., & Krusell, P. (1997). Long-run implications of investment-specific technological change. American Economic Review, 87, 342-362.

Gurkaynak, R. S. (2008). Econometric test of asset price bubbles: Taking stock. Journal of Economic Surveys, 22(1), 166-186.

Hayashi, F. (1982). Tobin's marginal q and average q: A neoclassical interpretation. Econometrica, 50, 213-224.

Hou, H., & Cheng, S. Y. (2017). The dynamic effects of banking, life insurance, and stock markets on economic growth.Japan and the World Economy,41, 87–98.

Hui, C. S. (2010). Investor mood and financial markets. Journal of Economic Behavior and Organization, 76(2), 267-282.

Ikeda, D. (2013). Monetary policy and inflation dynamics in asset price bubbles. Bank of Japan Working Paper Series, No.13-E-4.

Jermann, U., & Quadrini, V. (2012). Macroeconomic effects of financial shocks. American Economic Review, 102(1), 238-271.

Kahenman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.

Kiyotaki, N., & Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2), 211-248.

Lamont, O. (1998). Earning and expected returns. Journal of Finance, 53(2), 1563-1587.

Lee, I. (1993). On the convergence of informational cascades. Journal of Economic Theory, 61(2), 396-411.

Liu, Z., Wang, P., & Zha, T. (2011). Land price dynamics and macroeconomic fluctuations. NBER Working Papers, No. w17045.

Manzoor, D., & Taghipour, A. (2016). A dynamic stochastic general equilibrium model for an oil exporting and small open economy: The case of Iran. Quarterly Journal of Economic Research and Policies, 23(75), 7-44.

Martin, A., & Ventura, J. (2012). Economic growth with bubbles. American Economic Review, 102(6), 3033-3058.

Miao, J. (2014). Introduction to economic theory of bubbles. Journal of Mathematical Economics, 53, 130-136.

Miao, J., & Wang, P. (2011). Bubbles and credit constraints. Working Paper, Boston University and HKUST.

Miao, J., Wang, P., & Xu, Z. (2012). A Bayesian DSGE model of stock market bubbles and business cycles. Working Paper, Boston University.

Miao, J., Wang, P., & Xu, Z. (2015). A Bayesian dynamic stochastic general equilibrium model of stock market bubbles and business cycles. Quantitative Economics, 6(3), 559-635.

Modigliani, F. (1986). Life cycle, individual thrift, and the wealth of nations. Science, 234(4777), 704-712.

Musai, M., Mehregan, N., & Amiri, H. (2010). Stock market and macroeconomic variables: A case study for Iran. QuarterlyJournal of Economic Research and Policies, 18(54), 73-94.

Nazes, D., & Silva, D. (2007). Rational bubbles in emerging stock markets. MPRA Paper, 4641, 1-10.

Paetz, M., & Gupta, R. (2016). Stock price dynamics and the business cycle in an estimated DSGE model for South Africa. Journal of International Financial Markets, Institutions and Money, 44, 166-182.

Payandeh Najafabadi, A. T., Qazvini, M., & Ofoghi, R. (2012). The impact of oil and gold prices’ shock on Tehran stock exchange: A copula approach. Iranian Journal of Economic Studies, 1(2), 23-47.

Salehabadi, A., & Dalirian, H. (2010). Testing the existence of price bubble in Tehran stock market. Quarterly Journal of Securities Exchange, 3(9), 61-75.

Salmani Bishak, M. R., Barghi Oskooee, M. M., & Lak, S. (2016). The effects of monetary and fiscal policy shocks on stock market of Iran. Journal of Economic Modeling Research, 6(22), 93-131.

Samadi, S., Vaez Barzani, M., & Ghasemi, M. R. (2010). The behavioral analysis of the formation price bubbles in capital market (case study: Tehran stock market 1997-2009). Economics Research, 10(3), 273-297.

Senhadji, A. S., & Collyns, C. (2002). Lending booms, real estate bubbles, and the Asian crisis (No. 02/20). International Monetary Fund.

Seven, U., & Yetkiner, H. (2016). Financial intermediation and economic growth: Does income matter? Economic Systems, 40(1), 39–58.

Shahmoradi, A. (2008). The effects of energy price changes on the price level, production, and welfare in Iran’s economy. The Ministry of Economic Affairs and Finance.

Shahmoradi, A., & Ebrahimi, E. (2010). The impact of monetary policies in Iran: A DSGE approach. Journal of Monetary and Banking Researches, 2(3), 31-56.

Shiller, R.J. (1981). Does stock price move too much to be justified by subsequent changes in dividends? American Economic Review, 71, 421-436.

Smets, F., & Wouters, R. (2003). An estimated stochastic dynamic general equilibrium model of the Euro area. Journal of the European Economic Association, 1(5), 1123–1175.

Smets, F., & Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review, 97(3), 586-606.

Tirole, J. (1982). On the possibility of speculation under rational expectations. Econometrica, 50, 1163-1181.

Uhlig, H. (1999). A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily in Computational Methods for The Study of Dynamic Economies. Oxford University Press.

Vaez, M., & Torki, L. (2008). Price bubbles and capital market in Iran. Quarterly Research Bulletin of Isfahan University (Humanities), 31(3), 195-207.

Zagaglia, P. (2009). Forecasting with a DSGE model of the term structure of interest rates: The role of the feedback. Central Bank of Sweden