Abstract
This research paper analyses the impact of COVID-19 to investigate the overconfidence bias in 12 cyclical and defensive sectors in pre- and during COVID-19 periods using daily data from 1 January 2015 to 31 December 2020. The results of VAR show that in the pre COVID-19 phase overconfidence bias is more prevalent in all the cyclical sectors; in particular, MEDIA, METAL and REALTY have highly significant coefficients . In the defensive sectors, the VAR outcomes are not as strong as we expected, except for SERVICES. During the COVID-19 period, the investor shifted their focus to COVID-19-related opportunities, leading to a surge in the IT and PHARMA sectors. In both phases, METAL, MEDIA and REALTY exhibit overconfidence-driven stock trading behaviour. ENERGY is the only sector in both the phases that does not witness overconfidence bias.
Highlights
One of the most common behavioural anomalies is overconfidence bias
The primary objective of this paper was to delve into the overconfidence bias of cyclical and defensive sectors, during regular and pandemic periods
Using vector autoregression (VAR) and impulse response functions (IRFs), we show that there is a relationship between market return and volume for all the cyclical sectors in the pre-COVID-19 era because the relevant coefficients are positive and significant for most lagged market returns
Summary
One of the most common behavioural anomalies is overconfidence bias. It is regarded to be a primary source of excessive trading, which results in severe fluctuation in financial markets (Abbes 2013; Gupta et al 2018). Such disturbances produce an economic mirage, causing healthy markets to collapse, with severe repercussions for both regulators at home and abroad. These behavioural fallacies are more visible during times of high stress, instability, or crisis, such as the recent COVID-19 outbreak. The negative effect of the virus is felt over the world, leading the World Health Organisation (WHO) to declare it a pandemic on 11 March 2020
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