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Title An Empirical Inquiry into the behavioral Dynamics of South Asian Emerging Stock Markets

Author(s) Sami Ud Din

Abstract This study traces behavioral patterns which influence the aggregate market in terms of under and overreaction. These reactions are mostly observed in the form of excess volatility and unsystematic patterns in trading volumes. Self-attribution, anchoring, herding, disposition effect, and limited attention bias are selected for this study. The study is conducted on Karachi Stock Exchange, Bombay Stock Exchange, Dhaka Stock Exchange, and Dow Jones Industrial Average for Pakistani, Indian, Bangladeshi, and U.S stock markets respectively. The study is conducted for the period 2009 to 2018 using secondary data. It was found that the overconfidence bias can be equally observed in Pakistani, Bangladeshi, and the U.S stock markets. Using nearness to a historical high and nearness to a 52-week high as anchors, it was found that all sampled stock markets under-react to new incoming information. Herding bias was confirmed in Up and Down extreme market conditions for Pakistani and Bangladeshi stock markets respectively. Similarly, the turnover effect was confirmed in low turnover stocks for Down extreme market conditions in Pakistani and Bangladeshi stock markets only. The disposition effect is also confirmed in Pakistani and Bangladeshi stock markets. The limited attention bias is tested and confirmed in terms of the significant relationship between price momentum profits and trading volume in Pakistani and Bangladeshi stock markets. Owing to the existence of these behavioral biases in the sampled stock markets, the market over hypothesis was tested through the Average Cumulative Excess Returns analysis. The results confirmed overreaction for Pakistani and Bangladeshi stock markets. This implies that losers in one testing period become winners in subsequent periods due to the investor’s overreaction and vice versa. Moreover, excess volatility in relation to market reactions and trading turnover is tested. It was concluded that behavioral biases in sampled stock markets lead to excess volatility while market overreactions along with excess volatility influence the trading turnover. Interestingly, investors’ decisions in such trends are dependent on behavioral biases, and as a result market overreaction becomes more prolonged and denser. In other words, the over-trading on part of investors motivated by behavioral biases results in aggregate excess volatility primarily because of the underlying momentum in trading trends. The results of the study are useful for individual investors in their general awareness of behavioral biases, for regulators in coming up with more efficient models regarding stock price estimation, and for mutual funds managers to improve the safety of their investments.

Type Thesis/Dissertation PhD

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2022-09-08

Subject Finance

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