Academic journal article International Management Review

Study of the Dynamics of Asset Prices by a Behavioral Approach: Theoretical Foundations & Empirical Investigation

Academic journal article International Management Review

Study of the Dynamics of Asset Prices by a Behavioral Approach: Theoretical Foundations & Empirical Investigation

Article excerpt

[Abstract] We study according to the work of Statman, Thorley and Vorkink (2004), Glaser and Weber (2004) and Chuang and Lee (2006), the dynamic relationship between the overconfidence of investors and the volume of transactions. This study aims to show, first, that overconfidence is a systematic cognitive bias most investors suffer from and the effect of which can affect the efficiency of financial markets. We test this hypothesis for a sample of 35 Tunisian companies over a period of 2000 to 2010 according to frequency (daily, weekly, and monthly) using a range of econometric tests or tests of Granger causality. Then we applied vector autoregression VAR modeling and impulse response functions associated. We prove the presence of excess confidence in the Tunisian market through a significant relationship Granger returns to the current market volume of transactions. In addition, we can test the hypothesis that overconfidence encourages the volume of transactions. Because these results support the hypothesis of the disposition effect, we argue our study distinguishes the overconfidence of this bias. Following the positive and significant relationship between past market returns and individual trading volume in individual past performance, we can validate the overconfidence hypothesis and distinguish it from the effect of this provision, which allows us to conclude that the exchange market activity is not a simple summation of disposition effecting individual securities.

[Keywords] behavioral finance, over-confidence, excessive volatility, VAR market, VAR individual securities, causality, functions pulse responses

(ProQuest: ... denotes formulae omitted.)

Introduction

The dynamic relationship between stock returns and trading volume was the subject of much research in the financial literature since the 1950s; yield and volume are two main pillars around which revolves the entire stock market (Mahajan & Singh, 2009). With the emergence of the hypothesis of market efficiency in the 70s, the role of price variability has increased considerably. Indeed, the relevance of a financial market is the ability of prices to fully reflect all available information on past, present, and future events. In other words, the market is informationally efficient if all the useful information in the evaluation of listed securities is reflected automatically reflected in the price. So, the market is a vast hub of information. Quality traffic transmission or dissemination of this information depends on the efficiency of the market. In terms of its impact on the characteristic quantities of the economy and its performance, it is in the interest of modern economies to achieve efficiency in the dynamics of stock markets. However, the movements in the stock market cannot be determined only by focusing only on the univariate price dynamics.

The study of stock prices without being associated with trading volume can transmit only vague information about the trading activity of the market (Mahajan & Singh, 2009). It is well established in the literature that prices react to the arrival of new information, and the volume of transactions is considered essential information, which indicates the direction that prices should take. This means that the volume is an important indicator to predict market trends. We can, therefore, conclude that trading volume plays an important role in informing the market. Therefore, according to Harris and Raviv (1993) trading volume reflects the information on changes in prices and the agreement in investor expectations. The study of the joint dynamics between returns and trading volume is, therefore, of paramount importance in that it sheds light on the understanding of the microstructure of the stock markets and highlights the level efficiency of those markets.

In addition, two stylized facts have long attracted the interest of academic researchers in the literature of financial markets: the variation in time of the conditional volatility and the persistence of the volatility of returns (Gursoy et al. …

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