The Effects of Mood and Overconfidence on Stock Returns: Evidence from Tehran Stock Exchange

Existing research has documented a positive correlation between mood and stock returns during the recovery period from seasonal affective disorder (SAD) and on the last working day before the weekend. These phenomena represent two different types of mood effect known as April effect and weekend effect, respectively. Prior studies have also reported that investor overconfidence negatively influences investment returns. This study aims to analyze the impact of these two major behavioral traits - mood and overconfidence - on stock returns simultaneously. Specifically, we investigate the mediating effect of overconfidence on the good mood-stock return relationship and the moderating effect of mood on the overconfidence-stock return relationship as well as the mood and overconfidence effects. To this end, we develop and test three hypotheses with the multiple regression analysis. Stock returns are computed by using daily index numbers of the TEDPIX equal-weighted index, the Tehran Stock Exchange’s main index from February 2015 to January 2021. April (recovery period from SAD) and Wednesday (weekend mood; Wednesday represents Friday in Iran) are employed as proxies for positive mood, while turnover rate manifests overconfidence. The results show that positive mood elevated during the offset period of SAD (April) has a positive correlation with stock returns. Overconfidence lowers stock returns but the mediating effect of overconfidence is not supported. The negative effect of overconfidence on stock returns, however, turns positive in April. These findings together confirm the expected effects of mood and overconfidence on stock returns and discover unexpected moderating effect of good mood on the overconfidence-stock return relationship. No weekend effect is detected in the Iranian market. Rather, an early-in-the-week effect is observed. The empirical evidence is expected to help investors to form portfolios, which are immune to the influences of mood and overconfidence bias, and provide them with an investment strategy to time the market and earn abnormal returns.