Abstract
PurposeThis study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock market.Design/methodology/approachUsing daily trading data of Karachi Stock Exchange-100 index from January 2012 to December 2015, different regression models, including descriptive statistics and stationarity tests, are performed.FindingsResults indicate that stock market trading has suffered from pessimistic behaviour of investors. In the first model, the authors find a positive sign of confidence and negative sign of optimism with the trading volume. The second model shows a positive role of confidence and rational expectations in affecting the trading volume in daily, Monday and Friday samples. The results of the third model show a negative sign of both optimism and rational expectation with the trading volume. Furthermore, the next model shows a negative sign of confidence combined with pessimism while testing their relationship with the trading volume. Finally, results of the final model suggest that optimism negatively affects the trading volume, and on the other hand, pessimism has a positive impact on the trading volume.Research limitations/implicationsThe method and empirical testing of behavioural biases and their relationship with economic variable used in this study seem to be a promising way to better understand the role of psychology in deriving financial decisions for academics and policymakers.Originality/valueThis study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.
Highlights
Extensive research has confirmed the existence of anomalies and seasonality in assets’ returns debate, both in developed and developing capital markets such as Friday and Monday effect (Keim and Stambaugh, 1984; Sias and Starks, 1995) and anomalies in small size capitalisation (Chen and Zhou, 2001)
This paper models rationalism in investment decisions based on rational expectation theory and the theory of price movement
This study has examined the effects of behavioural biases on investment decision-making prevailing in the Karachi Stock Exchange ( Pakistan Stock Exchange (PSX)) over four years, starting from 2012 to 2015
Summary
Extensive research has confirmed the existence of anomalies and seasonality in assets’ returns debate, both in developed and developing capital markets such as Friday and Monday effect (Keim and Stambaugh, 1984; Sias and Starks, 1995) and anomalies in small size capitalisation (Chen and Zhou, 2001). Anomalies are found in developing markets such as seasonality in Kuala Lumpur Stock Exchange (Pandey, 2002), anomalies and seasonality in Malaysia, Philippines, Singapore and Hong Kong (Aggarwal and Rivoli, 1989) and seasonal and cultural effect in various Asian countries (Chan et al, 1996). Published in Asian Journal of Accounting Research. The full terms of this licence may be seen at http:// creativecommons.org/licences/by/4.0/legalcode
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