The Dynamic Effects of Anchoring on Portfolio Return Volatility; Are there any economic issues in the developing world?

Abstract

This study aims to see the anchoring effect on portfolio return volatility in the case of KSE-30. Business anomalies such as overreaction and under-reaction are affected by a variety of psychological causes. The use of anchors or baseline values known as the anchoring effect causes market under-reaction and overreaction. This research used nearness to 52-week high and nearness to historical high as proxies for under and over-reaction, respectively, to analyze the psychological causes for under and over-reaction. On the KSE-30, the findings revealed that proximity to the 52-week peak positively predicts future returns, whereas proximity to the historical high negatively predicts future returns. KSE-30 was used for rigorous testing. Similarly, the three macroeconomic variables used as control variables are the exchange rate, inflation rate, and interest rate to provide a more robust model of strong prediction capacity. The findings revealed that proximity to the 52-week maximum and proximity to the historical high and other macroeconomic factors had a forecast capacity of around 62 percent. Similarly, focused on volatility clusters, the GARCH (1, 1) model was used to measure the association between potential and past returns. The results show that there is a first order autoregressive function in the GARCH (1, 1) model. The findings also show that their predictive capacity decreases when the study's individual variables are moved from every day to annual Periods.