International Journal of Business and Economics Volume 19, No. 3 December, 2020

Manifesting Overconfidence Bias and Disposition Effect in the Stock Market

Ganesh R

Assistant Professor, Department of Commerce and Management Studies, St. Mary’s College, India.

Naresh G

Associate Professor, Indian Institute of Management, Ranchi, Jharkhand, India.

Thiyagarajan S

Assistant Professor, Department of International Business, Pondicherry University, India.

Abstract

The study investigates the influence of overconfidence bias and disposition effect among the investors in the Indian stock market by examining these biases' presence on individual stocks in the index. The study also aims to determine which of the two biases, overconfidence or disposition, dominates the market. Security-wide Vector Autoregression (VAR) model, impulse response function, and nonlinear analysis are used to inspect the presence of overconfidence bias and disposition effect in the market. The study's findings have shown both biases are present in the Indian market, with the former being predominant. Knowledge of the two effects in the market can be exploited by the investors to maximize their returns from the market. Simultaneously, administrators can take preventive measures before market turbulence goes beyond control, damaging the investors.

Keywords：Overconfidence Bias, Loss Aversion Bias, Disposition Effect, Vector Autoregression, and Impulse Response Function.

JEL Classifications：G02, G11, G12.

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