A Study of Investor Behavior and its Impact on Trading Activity of Stocks

Abstract

A research study was conducted in an area of stock markets in order to investigate the impact of investor behavior on trading activity of stocks. The study was focused on KSE (Karachi Stock Exchange). The study was carried by using VAR (vector auto regression model). The main objective was to study the interaction of investor overconfidence and stock returns. In order to achieve this objective the data for different variables was taken from Balance sheet Analysis published by State Bank of Pakistan website of KSE and Open doors, the study was longitudinal in nature, as data of various years were collected and analyzed. In this study data from 2000 till 2012 was used. Data base was consists of daily and monthly observations of KSE, monthly observations for trading volume and returns while estimate of volatility was constrained by the availability of daily returns. The main focus was on monthly observations under the perspective that was change investor overconfidence occur over monthly or annual horizons. A vector autoregressive response functions were used in order to study the interaction between investor behavior, market returns and trading proxies. The model selection was based on econometric theory. Returns on KSE 100 index are used as proxy for market returns (RET).KSE 100 index is a value weighted index of 100 companies while it hold over 90% of total market capitalization of the companies listed on Karachi Stock Exchange. The results of the VAR infer that volume is in And there is an insignificant relationship between overconfidence and trading stock activity that Overconfidence of investors has negative impact on trading stock activity investor’s overconfidence keeps the turnover at more elevated level and there is no relationship between monthly volumes with previous market returns that Increase in trading activity doesn’t add to monthly volatility in stock returns. Granger causality test was used to approve the result of VAR. Thus granger test reveal that monthly volatility has impact on return. The result was in conformity with the findings of VAR and Null hypothesis has been accepted.