Contribution of Behavioral Biases Towards Market Reactions

Abstract

The research aims to indicate the behavioral biases that contributes toward the creation of market over reaction and under reaction. In the study seven behavioral biases are taken as the independent variable and the dependent variable used to capture the market reactions is the weekly closing prices of sixty companies. These companies are then divided into three groups the low performers, the average performers and the high performers based on their market capitalization. The data collected for the companies is of 8 years from Jan 2011 – Dec 2018. The data for the behavioral biases is gathered through questionnaires. 416 questionnaires were filled in order to find the impact of the biases on the market reactions. SPSS has been used in order to analyze the data by using different statistical techniques. Cronbach alpha is the test used for reliability of the items of the questionnaire. All the items used in the questionnaire are found to be reliable according to the reliability analysis. The correlation analysis is used to find the relationship among the variables and it has been found that there exists positive correlation among all the independent and dependent variable. The ANOVA test shows that the relationship of biases with the dependent variable is significant moreover F stat also shows that the model of the study is fit and reliable. The regression test is used to check that which biases contributes towards the creation of market reactions. The regression analysis is done for each group of companies separately the overconfidence bias, representative bias and loss aversion bias has a positively significant impact towards market reactions (over reaction, under reaction) in all three groups of the companies. The herding behavior bias has positively significant impact on market reactions in the low performing companies group and the high performing companies group. The behavioral bias that is availability bias has positively significant impact on the average performing companies group and the high performing companies group. The two behavioral biases that are the anchoring bias and the illusion of control bias shows insignificant impact on the market reactions in all the three groups of the companies. Thus it is observed in the study that behavioral biases contributes in creating market over reaction and under reaction.