Exploring Behavioral Biases in Stock Market: Evidence from India

Due to the positive association between investments and the development of the economy, the rise of investment will progressively influence the economy's overall growth and vice versa. Thus, investors’ decisions play a significant role in describing the market trend, which in turn affects the economy. Individuals invest with unique planning or no planning at all based on their available funds, time span, and financial goal. Ultimately, the majority of them want high returns that will make them wealthy overnight Regardless of how strong the company fundamentals are, strong negative emotions can wreck down a robust bullish market trend. The investor behavior is guided by many factors, such as investment horizons, other investors' actions, risk capacity, personality, and level of volatility in equity markets. Past studies have highlighted that individuals commit various behavioral anomalies due to incomplete information, shortage of technical skills, and belief in their competencies to invest while investing. This study has empirically tried to determine the presence of the predominant behavioral anomalies; the herding bias, overconfidence bias, disposition effect, and noise trading in the Indian stock market. Herding has been tested using the cross-sectional absolute deviation methodology as described by Chang et al. (2000). The other biases have been tested using a time-series regression model, such as VAR and Granger causality. Our sample consists of Nifty 50 companies for 21 years (January, 2000-December, 2020). The research shows that Indian stock markets are efficient as we fail to validate the herding bias for the overall market. However, herd mentality exists in crisis and extreme market conditions. The results also validate the existence of anomalies, such as the disposition effect, overconfidence, and noise trading in the Indian stock market.