Behavioral Biases and the Rationality in Stock Market Investments; Evidence from Sri Lanka

The main objective of this research is to analyze the vital impact of macroeconomic factors on the stock market performance in Sri Lanka. All the factors which have a direct impact on the working of the emerging stock market have hereby studied. The relationship between the pivotal factors such as inflation, gross domestic product, interest rates, and exchange rates has been properly conducted with the assistance of the indexes. The results of the analysis revealed that all these factors have an inseparable impact over the performance of the stock market and Sri Lankan stock market performance has eventually over gone through many ups and downs because of them as well. It has been revealed that among all the factors that have been discussed, inflation and exchange rates have comparatively higher effects on the stock market performance. It shows a fluctuation because of the unpredictable nature of these factors. Colombo Stock Exchange has seen a tremendous change in its performance over a period for which these factors have played a prominent as well as a vital role in it its functioning.

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Stock market development and economic growth in Sri Lanka

International Journal of Business and Emerging Markets ◽

10.1504/ijbem.2014.063888 ◽

2014 ◽

Vol 6 (3) ◽

pp. 271 ◽

Cited By ~ 1

Author(s):

Athambawa Jahfer ◽

Tohru Inoue

Keyword(s):

Economic Growth ◽

Sri Lanka ◽

Stock Market ◽

Market Development ◽

Stock Market Development

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Misvaluation and behavioral bias in the Brazilian stock market

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201805770 ◽

2019 ◽

Vol 30 (79) ◽

pp. 107-122

Author(s):

José Bonifácio de Araújo Júnior ◽

Otávio Ribeiro de Medeiros ◽

Olavo Venturim Caldas ◽

César Augusto Tibúrcio Silva

Keyword(s):

Stock Market ◽

Behavioral Finance ◽

Time Window ◽

Abnormal Returns ◽

Investment Strategy ◽

Short Term ◽

Publicly Traded Companies ◽

Behavioral Biases ◽

Three Samples ◽

Investment Portfolios

ABSTRACT The study sought to apply the model developed by Gokhale et al. (2015) to identify the existence of overreaction and behavioral biases in the Brazilian stock market and analyze its performance as an investment strategy on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA) in the short term and long term, as well as test its robustness with time window simulations. The impacts of behavioral finance on capital markets can affect economic decisions, perpetuate or increase asset pricing anomalies, and in more extreme and persistent situations contribute to the formation of bubbles that can compromise the entire financial system of a country. The study pioneers an innovative methodology in the Brazilian stock market for identifying behavioral biases and obtaining abnormal returns and higher returns than the Ibovespa. The research uses the model developed by Gokhale, Tremblay, and Tremblay (2015) in three samples with quotations data for Brazilian publicly-traded companies that compose the Ibovespa and IBrA in the period from 2005 to 2016. With the R statistical software, the Fundamental Valuation Index (FVI) was calculated for each sample share and each year. From the FVI index, the undervalued shares were identified, indicating that the sales price does not reflect their economic fundamentals, and portfolio simulations were carried out for investment over three months or the next year. The results indicate the possible existence of overreaction and behavioral biases in the Brazilian stock market, which lead to the possibility of higher abnormal returns than those of the Ibovespa. Similar to the US market, at the end of the 2006-2016 period simulated portfolios yielded more than 274%, while the Ibovespa yielded approximately 80%. The robustness tests attest to the effectiveness of the model. The various investment portfolios, simulated over different time horizons, yielded more than the Ibovespa on average. The study also confirmed the assumptions of Gokhale, Tremblay, and Tremblay (2015) regarding the model's inadequacy for short-term strategies.

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The Degree of Financial Leverage as a Determinant of Financial Risk: An Empirical Study of Colombo Stock Market in Sri Lanka

SSRN Electronic Journal ◽

10.2139/ssrn.2206703 ◽

2012 ◽

Cited By ~ 1

Author(s):

Vijitha Gunarathna

Keyword(s):

Sri Lanka ◽

Stock Market ◽

Empirical Study ◽

Financial Risk ◽

Financial Leverage

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Examining investors' sentiments, behavioral biases and investment decisions during COVID-19 in the emerging stock market: a case of Pakistan stock market

Journal of Economic and Administrative Sciences ◽

10.1108/jeas-08-2020-0153 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Shagufta Parveen ◽

Zoya Wajid Satti ◽

Qazi Abdul Subhan ◽

Nishat Riaz ◽

Samreen Fahim Baber ◽

...

Keyword(s):

Developing Countries ◽

Stock Market ◽

Behavioral Finance ◽

Stock Markets ◽

Investment Decisions ◽

Equation Modeling ◽

Disposition Effect ◽

Content Type ◽

Behavioral Biases ◽

The Impact

PurposeThis study investigates the impact of the COVID-19 pandemic on investors' sentiments, behavioral biases and investment decisions in the Pakistan Stock Exchange (PSX).Design/methodology/approachThe authors have assessed investors' behaviors and sentiments and the stock market overreaction during COVID-19 using a questionnaire and collected data from 401 investors trading in the PSX.FindingsResults of structural equation modeling revealed that the COVID-19 pandemic affected investors' behaviors, investment decisions and trade volume. It created feelings of fear and uncertainty among market participants. Evidence suggests that behavioral heuristics and biases, including representative heuristic, anchoring heuristic, overconfidence bias and disposition effect, negatively influenced investors' decisions at the PSX.Research limitations/implicationsThis study will contribute to behavioral finance literature in the context of developing countries as it has revealed the impact of COVID-19 on the emerging stock market, and its results are generalizable to other emerging stock markets.Practical implicationsThe findings of this study will help academicians, researchers and policymakers of developing countries. Academicians can formulate new behavioral models that can depict the solutions of dealing with an uncertain situation like COVID-19. Policymakers like the Securities Exchange Commission and the PSX can formulate crisis management strategies based on behavioral finance concepts to cope with situations like COVID-19 in the future and help lessen investors' losses in the stock markets. The role of the Securities Exchange Commission is crucial as it regulates the financial markets. It can arrange workshops to educate investors to manage their decisions during crisis time and focus on the best use of irrational and rational decision-making at the same time using Lo (2004) adaptive market hypothesis.Originality/valueThe novelty of the paper is that the authors have introduced overconfidence and disposition effect as mediators that create a connection between representative and anchoring heuristics and investment decisions using primary data collected from investors (institutional and retail) to demonstrate the presence of psychological biases during COVID-19, and it has been done for the first time according to authors' knowledge. It is a contribution and addition to the behavioral finance literature in the context of developing countries' stock markets and their efficiency.

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