An Empirical Study of Indian Stock Price Movement A Behavioral Finance Perspective

Abstract

Market efficiency has been long debated in Finance literature. Efficient Market Hypothesis (EMH) supporters hold the theory that markets are efficient. This group of researchers have proposed many different asset pricing models which are fundamentally founded on EMH, termed as traditional asset pricing models. This line of thinking and the models based on it have been dominant until late 90s. However, the high volatility in stock markets, which as proposed by Schiller has attracted researchers towards behavioral finance. His contributions enabled to explain the stock markets better than the widely accepted EMH. This new line of thought has given rise to the behavioral approach to asset pricing, which takes into account the effect of investor sentiment on the asset prices and models them accordingly. This approach has also explained the variability in asset returns and has built models which are more close to the real market scenario. newlineThis study is done with the main aim of testing the presence of investor behavior in emerging markets such as India and also to identify as well as measure the role of investor behavior in stock price movement in India. This study has been divided into three sections. First section tests the presence of investor behavior through decomposition of market anomalies and investigation of their true sources. Building upon the findings of this section, the second section studies the role and effect of investor sentiment on stock price movement. In this section, the asymmetric volatility and negative volatility as well as co-movement of implied volatility index (VIX) and NIFTY index has been studied to understand how behavior of investors, influence the stock price returns. The third section attempts to construct a Sentiment index (SIX) solely based on investor sentiments through different proxy measures. Then, the index newlinev newlineis plotted and tested for co-movement along with the NIFTY index to conform the role of investor behavior in stock price movement. newlineA quantitative approach has been adopted