Behavioral Finance Models and Behavioral Biases in Stock Price Forecasting

Subject Areas : Financial and Economic Modelling

Nader  Rezaei ¹ (Department of Accounting and Finance, Humanities Faculty, Maragheh Branch, Islamic Azad University, Maragheh, Iran)
Zahra  Elmi ² (Department of Accounting and Finance, Humanities Faculty, Maragheh Branch of Islamic Azad University, Maragheh, Iran)

Received: 2018-10-10 Accepted : 2019-01-03 Published : 2018-12-01

Keywords: Overreaction, Bayes' rule, Under-reaction, Behavioral Finance,

Abstract :

Stock market is affected by news and information. If the stock market is not efficient, the reaction of stock price to news and information will place the stock market in overreaction and under-reaction states. Many models have been already presented by using different tools and techniques to forecast the stock market behavior. In this study, the reaction of stock price in the stock market was modeled by the behavioral finance approach. The population of this study included the companies listed on the Tehran Stock Exchange. In order to forecast the stock price, the final price data of the end December, March, June, and September 2006-2015 and the stock prices of 2014 and 2015 were analyzed as the sample. In this study, Bayes' rule was used to estimate the probability of the model change. Through this rule, the probability of an event can be calculated by conditioning the occurrence or lack of occurrence of another event. The results of model estimation showed that there is the probability of being placed in high-fluctuated regimes (overreaction) and low- fluctuated (under-reaction of stock price despite the shocks entered to the stock market. In modelling with the 4-month final prices, it was proved that the real stock price had no difference from the market price.

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