Role of overconfidence as mediator between anchoring heuristic and trade volume in Pakistan Stock Exchange

Shagufta Parveen

Abstract


The purpose of this study is to investigate overconfidence as a mediator between anchoring heuristic and trading volume of Pakistan Stock Exchange (PSX). To measure the role of overconfidence as a mediator between anchoring heuristic and trading volume, a sample of daily trading data from January 1st, 2004 to December 31st, 2017 of 301 listed companies at PSX is collected. Overconfidence was measured through market volatility, the 52-week high price is used as a proxy to measure anchoring heuristic, and investors’ investment decisions in PSX are measured through trading volume. Results of structural equation modeling revealed that market volatility plays a significant role between 52 weeks high price and trading volume at PSX. Results suggest that overconfident investors use 52 weeks high price to trade stocks in the market and affect the investors’ investment decisions. This paper adds to the literature of behavioral finance concerning the role of overconfidence as a mediator between anchoring heuristic and investment decisions. The evidence documented in this paper is first known to measure the role of mediator between anchoring heuristic and investment decisions and it is the novelty of current study.

Keywords Market volatility, anchoring heuristic, 52 weeks high, trading volume, investment decisions.


Full Text:

PDF

References


Adel, Boubaker, and Talbi Mariem. (2013). "The Impact of Overconfidence on Investors' Decisions. Business and Economic Research, 3(2).

Ahmad, S. (2017). Factors Influencing Individual Investors’ Behavior: An Empirical Study of Pakistan Financial Markets. Journal of Business & Financial Affairs, 4(6), 1-8.

Alrabadi, D. W. H., Al-Abdallah, S. Y., & Aljarayesh, N. I. A. (2018). Behavioral biases and investment performance: Does gender matter? Evidence from Amman Stock Exchange. Jordan Journal of Economic Sciences, 5(1).

Bailey, W., Kumar, A., & Ng, D. (2011). Behavioral biases of mutual fund investors. Journal of Financial Economics, 102(1), 1-27.

Baker, H. K., & Nofsinger, J. R. (Eds.). (2010). Behavioral finance: investors, corporations, and markets (Vol. 6). John Wiley & Sons.

Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. (2019). How financial literacy and demographic variables relate to behavioral biases. Managerial Finance, 45(1), 124-146.

Baker, M., Pan, X., & Wurgler, J. (2012). The effect of reference point prices on mergers and acquisitions. Journal of Financial Economics, 106(1), 49-71.

Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The quarterly journal of economics, 116(1), 261-292.

Bashir, T., Azam, N., Butt, A. A., Javed, A., & Tanvir, A. (2013). Are behavioral biases influenced by demographic characteristics & personality traits? Evidence from Pakistan. European Scientific Journal, 9(29).

Bhootra, A., & Hur, J. (2013). The timing of 52-week high price and momentum. Journal of Banking & Finance, 37(10), 3773-3782.

Bolin, J. H. (2014). Hayes, Andrew F.(2013). Introduction to Mediation, Moderation, and Conditional Process Analysis: A Regression‐Based Approach. New York, NY: The Guilford Press. Journal of Educational Measurement, 51(3), 335-337.

Brüggemann, R., Glaser, M., Schaarschmidt, S., & Stankiewicz, S. (2014). The Stock Return-Trading Volume Relationship in European Countries: Evidence from Asymmetric Impulse Responses.

Cavaliere, G., Harvey, D. I., Leybourne, S. J., & Robert Taylor, A. M. (2015). Testing for Unit Roots Under Multiple Possible Trend Breaks and Non‐Stationary Volatility Using Bootstrap Minimum Dickey–Fuller Statistics. Journal of Time Series Analysis, 36(5), 603-629.

Chandra, A., & Kumar, R. (2011). Determinants of individual investor behaviour: An orthogonal linear transformation approach.

Chari, S., Hegde-Desai, P., & Borde, N. (2017). A review of literature on short term overreaction generated by news sentiment in stock market.

Chatfield, C. (2003). The analysis of time series: an introduction. Chapman and Hall/CRC.

Chen, G., Kim, K. A., Nofsinger, J. R., & Rui, O. M. (2007). Trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors. Journal of Behavioral Decision Making, 20(4), 425-451.

Costa, D. F., de Melo Carvalho, F., de Melo Moreira, B. C., & do Prado, J. W. (2017). Bibliometric analysis on the association between behavioral finance and decision making with cognitive biases such as overconfidence, anchoring effect and confirmation bias. Scientometrics, 111(3), 1775-1799.

Cueva, C., Iturbe-Ormaetxe, I., Ponti, G., & Tomás, J. (2017). Gender Differences in Trading Volume: Not Just Overconfidence. Dipartimento di Economia e Finanza Working Paper, 3.

Daniel, K., & Hirshleifer, D. (2015). Overconfident investors, predictable returns, and excessive trading. Journal of Economic Perspectives, 29(4), 61-88.

Dash, M. (2017). A STUDY ON GRANGER CAUSALITY IN THE CAPM. Journal on Management, 11(4).

Del Barrio Castro, T., Rodrigues, P. M., & Taylor, A. R. (2015). On the Behaviour of Phillips–Perron Tests in the Presence of Persistent Cycles. Oxford Bulletin of Economics and Statistics, 77(4), 495-511.

Demir, I. (2017). The Relevant Literature on Past Outcomes, Overconfidence and Risk Taking. In Overconfidence and Risk Taking in Foreign Policy Decision Making (pp. 9-17). Palgrave Macmillan, Cham.

Dhankar, R. S., & Devesh, S. (2019). Investor sentiment augmented multi-factor models: Evidence from India (unpublished).

F. Hair Jr, J., Sarstedt, M., Hopkins, L., & G. Kuppelwieser, V. (2014). Partial least squares structural equation modeling (PLS-SEM) An emerging tool in business research. European Business Review, 26(2), 106-121.

Fabozzi, F. J. (2015). Capital markets: institutions, instruments, and risk management. MIT Press.

Fernandes, J., Matsumoto, A., Chagas, P., & Ferreira, I. (2014). BEHAVIORAL FINANCE: A STUDY OF AFFECT HEURISTIC AND ANCHORING IN DECISION MAKING OF INDIVIDUAL INVESTORS. JOURNAL OF INTERNATIONAL BUSINESS AND ECONOMICS®, 14(1), 59.

Galariotis, E. C., Rong, W., & Spyrou, S. I. (2015). Herding on fundamental information: A comparative study. Journal of Banking & Finance, 50, 589-598.

Glaser, M., & Weber, M. (2007). Overconfidence and trading volume. The Geneva Risk and Insurance Review, 32(1), 1-36.

Grinblatt, M., & Keloharju, M. (2009). Sensation seeking, overconfidence, and trading activity. The Journal of Finance, 64(2), 549-578.

Gupta, S., Das, D., Hasim, H., & Tiwari, A. K. (2018). The dynamic relationship between stock returns and trading volume revisited: A MODWT-VAR approach. Finance Research Letters, 27, 91-98.

Haixia, Y. (2018). INVESTOR SENTIMENT, MANAGERIAL OVERCONFIDENCE, AND CORPORATE INVESTMENT BEHAVIOR.

Hao, Y., Chu, H. H., Ho, K. Y., & Ko, K. C. (2016). The 52-week high and momentum in the Taiwan stock market: Anchoring or recency biases?. International Review of Economics & Finance, 43, 121-138.

Hayes, A. F. (2018). Partial, conditional, and moderated moderated mediation: Quantification, inference, and interpretation. Communication Monographs, 85(1), 4-40.

Henseler, J., Ringle, C. M., & Sarstedt, M. (2015). A new criterion for assessing discriminant validity in variance-based structural equation modeling. Journal of the academy of marketing science, 43(1), 115-135.

Horne, C. (2016). Individualism as a driver of overconfidence, and its effect on industry level returns and volatility across multiple countries (Doctoral dissertation).

Horváth, L., Kokoszka, P., & Rice, G. (2014). Testing stationarity of functional time series. Journal of Econometrics, 179(1), 66-82.

Hsini, M. (2015). Noise, Uncertainty and Investor Psychology: A Behavioral Analysis. International Business Research, 8(7), 1.

Iqbal, A., Jebran, K., Rao, Z. U. R., Ahsan, T., & Mirza, S. S. (2015). Self-Attribution Bias, Overconfidence Bias, and Perceived Market Efficiency. International Journal of Business Insights & Transformation, 8(2).

Irshad, S., Badshah, W., & Hakam, U. (2016). Effect of Representativeness Bias on Investment Decision Making. Management and Administrative Sciences Review, 5(1), 26-30.

Is KSE index freeze beneficial? (2008, October). Retrieved from Dawn:

Jain, J., Walia, N., & Gupta, S. (2019). Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process. Review of Behavioral Finance.

Jentsch, C., & Rao, S. S. (2015). A test for second order stationarity of a multivariate time series. Journal of Econometrics, 185(1), 124-161.

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. science, 185(4157), 1124-1131.

Kahneman, D., Slovic, S. P., Slovic, P., & Tversky, A. (Eds.). (1982). Judgment under uncertainty: Heuristics and biases. Cambridge university press.

Kansal, P., & Sing, S. (2015). ANCHORING EFFECT IN INVESTMENT DECISION MAKING-A SYSTEMATIC LITERATURE REVIEW. Asia Pacific Journal of Research Vol: I. Issue XXXII.

Khan, M. H. (2014). An empirical investigation on behavioral determinants of perceived investment performance: Evidence from Karachi stock exchange. Research Journal of Finance and Accounting, 5(21), 129-137.

Khan, M. T. I., Tan, S. H., & Chong, L. L. (2019). Overconfidence Mediates How Perception of past Portfolio Returns Affects Investment Behaviors. Journal of Asia-Pacific Business, 20(2), 140-161.

Lee, E., & Piqueira, N. (2019). Behavioral biases of informed traders: Evidence from insider trading on the 52-week high. Journal of Empirical Finance, 52, 56-75.

Li, J., & Yu, J. (2012). Investor attention, psychological anchors, and stock return predictability. Journal of Financial Economics, 104(2), 401-419.

Liao, L. C., Chou, R. Y., & Chiu, B. (2013). Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market. The North American Journal of Economics and Finance, 26, 72-91.

Madaan, G., & Singh, S. (2019). An Analysis of Behavioral Biases in Investment Decision-Making. International Journal of Financial Research, 10(4).

Mishra, V., & Smyth, R. (2014). Is monthly US natural gas consumption stationary? New evidence from a GARCH unit root test with structural breaks. Energy Policy, 69, 258-262.

Mohamed, W. H., Lakhal, F., & Ajina, A. (2017). Investor's overconfidence and trading volume in the Tunisian market. EuroMed Journal of Management, 2(1), 59-76.

Munir, I. U., Yue, S., Ijaz, M. S., Zaidi, S. Y., & Hussain, S. (2018). Effect of Emotional Intelligence on Behavior of Investment: Possible Role of Financial Literacy and Gender. Asia Proceedings of Social Sciences, 2(2), 79-83.

Murhadi, W. R. (2018, March). Managerial overconfident and firm financing decision: an Indonesian case. In 15th International Symposium on Management (INSYMA 2018). Atlantis Press.

Odean, T. (1998). Are investors reluctant to realize their losses?. The Journal of finance, 53(5), 1775-1798.

Odean, T. (1999). Do investors trade too much?. American economic review, 89(5), 1279-1298.

Paparoditis, E., & Politis, D. N. (2018). The asymptotic size and power of the augmented Dickey–Fuller test for a unit root. Econometric Reviews, 37(9), 955-973.

Park, J., Konana, P., Gu, B., Kumar, A., & Raghunathan, R. (2010). Confirmation bias, overconfidence, and investment performance: Evidence from stock message boards. McCombs Research Paper Series No. IROM-07-10.

Prosad, J. M., Kapoor, S., Sengupta, J., & Roychoudhary, S. (2017). Overconfidence and disposition effect in Indian equity market: an empirical evidence. Global Business Review, 19(5), 1303-1321.

PSX Data Portal. (2019). Retrieved from Pakistan Stock Exchange: dps.psx.com.pk

Qadri, S. U., & Shabbir, M. (2014). An empirical study of overconfidence and illusion of control biases, Impact on investor’s decision making: an evidence from ISE. European Journal of Business and Management, 6(14), 38-44.

Qasim, M., Hussain, R., Mehboob, I., & Arshad, M. (2019). Impact of herding behavior and overconfidence bias on investors’ decision-making in Pakistan. Accounting, 5(2), 81-90.

Sabir, S. A., Mohammad, H. B., & Shahar, H. B. K. (2019). The Role of Overconfidence and Past Investment Experience in Herding Behaviour with a Moderating Effect of Financial Literacy: Evidence from Pakistan Stock Exchange. Asian Economic and Financial Review, 9(4), 480-490.

Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decision-making and perceived market efficiency: A survey at the Pakistan stock exchange. Qualitative Research in Financial Markets, 10(1), 85-110.

Shankar, D., & Dhankar, R. S. (2015). Understanding the Behavior of Stock Market Functionality: Need and Role of Behavioral Finance. Review of Management, 5(3/4), 5.

Shiller, R. J. (2000). Measuring bubble expectations and investor confidence. The Journal of Psychology and Financial Markets, 1(1), 49-60.

Statman, M., Thorley, S., & Vorkink, K. (2006). Investor overconfidence and trading volume. The Review of Financial Studies, 19(4), 1531-1565.

Subash, R. (2012). Role of behavioral finance in portfolio investment decisions: evidence from India.

Tan, G., Cheong, C. S., & Zurbruegg, R. (2019). National culture and individual trading behavior. Journal of Banking & Finance, 106, 357-370.

Tariq, B., & Ullah, N. (2013). Investor overconfidence and stock returns: Evidence from pakistan. IOSR Journal of Business and Management, 8(1), 77-84.

Taylan, P., Weber, G. W., & Beck, A. (2007). New approaches to regression by generalized additive models and continuous optimization for modern applications in finance, science and technology. Optimization, 56(5-6), 675-698.

Yasir, M. (2015). Attitude of Pakistan’s individual investor towards risk during bull and bear markets. VFAST Transactions on Education and Social Sciences, 5(2).

Yousaf, I., Ali, S., & Shah, S. Z. A. (2018). Herding behavior in Ramadan and financial crises: the case of the Pakistani stock market. Financial Innovation, 4(1), 16.

Yu, S. (2012). New empirical evidence on the investment success of momentum strategies based on relative stock prices. Review of Quantitative Finance and Accounting, 39(1), 105-121.

Zia, L., Ilyas Sindhu, M., & Haider Hashmi, S. (2017). Testing overconfidence bias in Pakistani stock market. Cogent Economics & Finance, 5(1), 1289656.


Refbacks

  • There are currently no refbacks.