Behavioral sentiment of investors in Iraq from price gaps

This research examines investor sentiment in frontier markets where limited data availability prevents the application of traditional sentiment indicators. The Iraq Stock Exchange (ISX), one of the largest frontier markets in the Middle East, has never been studied within the context of behavioral finance, creating a significant empirical gap. The research hypothesizes that price gap patterns derived exclusively from daily closing prices constitute valid proxies for investor sentiment in frontier markets, exhibiting statistically significant relationships with market returns and reflecting identifiable behavioral biases, including overreaction, herding, and sentiment persistence. Four gap-based sentiment indicators are constructed from 122 778 stock-day observations across 57 equities and seven sectors over 2304 trading days (August 2014 –August 2024): the Gap Ratio Indicator (GRI), Gap Intensity Index (GII), Sector Sentiment Dispersion (SSD), and Gap Persistence Indi­cator (GPI). Validation employs correlation analysis, cross-sectional return dispersion (CSSD) analysis, event study methodology on extreme sentiment days, and rolling 60-day window analysis. The hypothesis is confirmed: GRI demonstrates a statistically significant positive correlation with market returns (r = 0.269, p < 0.001). Of 122 778 observations, 3965 positive gaps (3.23%) and 3118 negative gaps (2.54%) indicate a moderate optimism bias. Negative gaps exhibit higher reversal rates (36.4%) than positive gaps (32.4%), consistent with loss aversion theory. The herding sub-hypothesis is partially refuted, as cross-sectional return dispersion increased rather than decrea­sed under extreme market conditions. The banking sector shows the highest sentiment sensitivity (r = 0.261), with significant hetero­geneity across sectors. This study provides the first behavioral finance analysis of the ISX and establishes a replicable framework for sentiment measurement in data-constrained frontier markets