What is Behavioral Finance

In this chapter, the authors investigate the relationship between investor sentiment and stock returns in an out of sample market, namely Borsa Istanbul. The authors use the Consumer Confidence Index as an investor sentiment proxy, while utilizing BIST Second National Index as a measure of small capitalized stock returns. The sample period spans from January 2004 to May 2014. By using monthly data, the authors employ cointegration test and error–correction based Granger causality models. The authors' findings suggest that there is a long-term relationship between investor sentiment and stock returns in Borsa Istanbul. Moreover, a unidirectional causal relationship from investor sentiment to stock returns is also found.