Past-oriented behavioral bias: A study on S&P & TEPIX index-es

Subject Areas : Financial Econometrics

Mohsen Mehrara ¹ , Saeid Tajdini ² , Jamal Maghsoudi ³ , Majid Lotfi Ghahroud ⁴ , Niloufar Ebrahimiyan ⁵ , Farzad Jafari ⁶

1 - Faculty of Economics, University of Tehran, Tehran, Iran
2 - Faculty of Economics, University of Tehran, Tehran, Iran
3 - Faculty of management, University of Tehran, Tehran, Iran
4 - Faculty of management, University of Tehran, Tehran, Iran
5 - Faculty of social sciences and economics, Alzahra University, Tehran, Iran
6 - Faculty of management, University of Tehran, Tehran, Iran

Received: 2021-05-09 Accepted : 2021-09-25 Published : 2022-01-01

Keywords: random walk theory, past-oriented behavioral bias, Behavioral Finance,

Abstract :

Behavioral finance had been becoming a fast-growing field of study in the past few years and because of the importance of investors' behavior in market performance, it's extremely noteworthy. By studying biases from their orientation perspective, we can divide them into two major groups, past-oriented, and current-oriented biases. In this research, a model had been developed for the past-oriented behavioral bias, which is closely related to the random walk theory. The research sample included the daily price information of 9 different industry indices in the Tehran Exchange Price Index (TEPIX), the index of 50 Top Companies in the Tehran Stock Exchange, and the S&P index in the New York Stock Exchange from 03/25/2011 to 03/19/2019. The results of the ARIMA model based on Markov switching models were measured for the degree of rigidity of these indexes by random walk theory, and then the effect of past-oriented behavioral bias was calculated in each of these 12 indexes by developing a new model. The results indicate that the cement index had the highest past-oriented behavioral bias (57%), followed by the top 50 companies index (46%), chemicals (41%), and oil product index (12%). However, the S&P index had no past-oriented behavioral bias.

References:

[1] Abarbanell, J.S., Bernard, V.L., Tests of Analysts’ Overreaction/ Underreaction to Earnings Information as an Explanation of Anomalous Stock Price Behavior, Journal of Finance, 1992, 47, P.1181-1207. Doi:10.2307/2328982

 

[2] Arbel, A., Strebel, P. J., Pay Attention to Neglected Firms, Journal of Portfolio Management, winter 1983, 9, P. 37-42. Doi:10.3905/jpm.1983.408901

 

 [3] Aren, S., Aydemir, S.D., and Şehitoğlu, Y., Behavioral biases on institutional investors: a literature review, Kybernetes, 2016, 45(10), P. 1668-1684. Doi:10.1108/K-08-2015-0203

 

[4] Assous, H. F., Al-Rousan, N., Al-Najjar, D., and Al-Najjar, H., Can International Market Indices Estimate TASI’s Movements? The ARIMA Model, Journal of Open Innovation: Technology, Market, and Complexity, 2020, 6(2), P.27. Doi:10.3390/joitmc6020027

 

[5] Bernstein, P. L. Against the Gods: The remarkable Story of Risk. USA: John Wiley and Sons, 1998.

 

[6]  Nawaz, B.,  Sarfraz, A.,  Hussain, H., Altaf, M., An empirical investigation on the existence of weak-form efficiency: The case of Karachi stock exchange, Management Science Letters, 2013, 3, P.65–72.

Doi: 10.5267/j.msl.2012.10.025

 

[7] Bogan, V., Just, D., and Dev, C., Team Gender Diversity and Investment Decision Making Behavior, Review of Behavioral Finance, 2013, 5, P.134-152. Doi:10.2139/ssrn.1638971

 

[8] Panda, C., Narasimhan, V., Predicting Stock Returns: An Experiment of the Artificial Neural Network in Indian Stock Market, South Asia Economic Journal, 2006, 5(3), P.33. Doi:10.1177/139156140600700203

 

[9] Bondt, W. F., and Thaler, R., Further Evidence on Investor Overreaction and Stock Market Seasonality, The Journal of Finance, 1987, 42(3), P.557-581. Doi:10.2307/2328371

 

[10] Chandra, A., Decision making in the stock market: Incorporating psychology with finance National Conference: FFMI 2008 IIT Kharagpur, 2008, https://mpra.ub.uni-muenchen.de/21288/1/Decision_Making_in_the_Stock_Market.pdf

 

[11] Chen, G., Kim, K.A., Nofsinger, J., Rui, O.M., Chang, C., Cici, G., Fitzgerald, V., Li, W., Lin, B., Seasholes, M.S., and Warnock, F.E, Behavior and performance of emerging market investors: Evidence from China, 2004, Doi:10.1002/bdm.561

 

[12] De Bondt, W., and Thaler, R., Does the stock market overreact? Journal of Finance, 1985, 40(30), P. 793-805. Doi:10.2307/2327804

 

[13] Desai, H., Jain, P., Long-run common stock returns following splits and reverse splits, Journal of Business, 1997, 70, P.409-433. Doi:10.1086/209724

 

[14] Duxbury, D., Behavioral finance: insights from experiments II: biases, moods, and emotions, Review of Behavioral Finance, 2015, 7(2), P.151 – 175. Doi:10.1108/RBF-09-2015-0037

 

[15] Eti, S., Kalkavan, H., Dinçer, H., and Yüksel, S., Predicting the Role of Islamic Banking on Sustainable Economic Development: An Analysis for Turkey with ARIMA Model, In U. Akkucuk (Ed.), Handbook of Research on Creating Sustainable Value in the Global Economy, 2020, P.146-164, IGI Global. Doi:10.4018/978-1-7998-1196-1.ch009

 

[16] Fama, E. F., Fisher, L., Jensen, M. C., and Roll, R., The Adjustment of Stock Prices to New Information, International Economic Review, 1969, 10(1), P.1–21. Doi:10.2307/2525569

 

[17] Fama, E. F., Efficient Capital Markets: A Review of Theory and Empirical Work, The Journal of Finance, 1970, 25(2), P.383–417. Doi:10.2307/2325486

 

[18] Finnerty, J. E., and Market Efficiency, The Journal of Finance, 1976, 31(4), P.1141–1148. Doi:10.2307/2326279

 

[19] Forbes, W.P.,   picking winners? a survey of the mean reversion and overreaction of stock prices literature. Journal of Economic Surveys, 1996, 10, P.123-158. Doi:10.1111/j.1467-6419.1996.tb00007.x

 

[20] Graham, J.F., Stendardi, E.J., Myers, J.K., and Graham, M.J., Gender differences in investment strategies: an information processing perspective, International Journal of Bank Marketing, 2002, 20(1), P. 17-26.

 Doi:10.1108/02652320210415953

 

[21] Grieb, T., and Reyes, M.G., random walk tests for latin american equity indexes and individual firms, Journal of Financial Research, 1999, 22, P.371-383. Doi:10.1111/j.1475-6803.1999.tb00701.x

 

[22] Gultekin, M., and Gultekin, N.B., Stock market seasonality: International Evidence, Journal of Financial Economics, 1983, 12, P.469-481. Doi:10.1016/0304-405X(83)90044-2

 

[23] Hackbarth, D., Managerial traits and capital structure decisions, Journal of Financial and Quantitative Analysis, 2008, 43(4), P.843–881. Doi:10.1017/S002210900001437X

 

[24] Hasani, M., gharkaz, M., maetoofi, A., Didehkhani, H., Investors' Behavioral Biases in Tehran Stock Exchange by emphasizing the Role of Significant Weaknesses in Internal Control, Advances in Mathematical Finance and Applications, 2021. Doi:10.22034/amfa.2021.1921343.1552

 

[25] Hirshleifer, D., Behavioral Finance, Annual Review of Financial Economics, 2015, 7(1), P.133–159.

Doi:10.1146/annurev-financial-092214-043752.

 

[26] Howard, C. T., Behavioral portfolio management, Journal of Behavioral Finance and Economics, 2014, P.1–37. Doi:10.2139/ssrn.2210032

 

[27] Huber, P., Stock market returns in thin markets: evidence from the Vienna stock exchange, Applied Financial Economics, 1997, 7, P. 493-518. Doi:10.1080/096031097333358

 

[28] Ikenberry, D., Rankine, G., and Stice, E., What do stock splits signal? Journal of Financial and Quantitative Analysis, 1996, 31(3), P.357-374. Doi:10.2307/2331396

 

 [29] Jaiswal, Bimal, and Kamil Naela., Gender, Behavioral Finance, and the Investment Decision, IBA Business Review 7.2, 2012: 8-22. Business Source Complete.

 

[30] Jokar, H., Shamsaddini, K., Daneshi, V., Investigating the Effect of Investors' Behavior and Management on the Stock Returns: Evidence from Iran, Advances in Mathematical Finance and Applications,2018, 3(3), P.41-52. Doi:10.22034/amfa.2018.544948

 

[31] Kahneman, D., and Tversky, A., Belief in Law of Small Numbers, Psychological Bulletin, 1971, 76(2), P.105-110. Doi:10.1037/h0031322

 

[32] Kanehman, D., and Tversky, A., Subjective Probability: A Judgment of Representatives, Cognitive Psychology, 1972, 3(3), P.430-454. Doi:10.1016/0010-0285(72)90016-3

 

[33] Kahneman, D., Tversky, A., On the psychology of prediction, Psychological Review, 1973, 80(4), P.237–251. 

 

[34] Kahneman, D., and Tversky, A., Prospect Theory: An Analysis of Decision under Risk, Econometrica, 1979, 47(2), P.263-292.  Doi:10.1037/h0034747

 

[35] Keim, D.B., Dividend yields and stock returns: Implications of abnormal January returns, Journal of Financial Economics, 1985, 14, P.473-489. Doi:10.1016/0304-405X(85)90009-1

 

[36] Lacalle, D., Are the effects of unconventional monetary policy on financial markets causing bubbles? Journal of Business Accounting and Finance Perspectives, 2018, 1(1), P.95–117. Doi:10.26870/jbafp.2018.01.003

 

 [37] Litzenberger, R., and Ramaswamy, K., The Effects of Dividends on Common Stock Prices: Tax Effects or Information Effects?  Journal of Finance, 1982, 37, P.429-443.Doi:10.2307/2327346

 

[38] Matsumoto, A. S., Fernandes, J. L., Chagas, P. C., and Oliveira, N. A., Overconfidence in individual and group investment decisions, Journal of International Finance and Economics, 2013, 13(1), P.109–114. Doi:10.18374/JIFE-13-1.11.

 

[39] Mehrara, M., Tajdini, S., Comparison of profitability of speculation in the foreign exchange market and investment in Tehran Stock Exchange during Iran's currency crisis using conditional Sharpe ratio, Advances in Mathematical Finance and Applications, 5(3), P.271-284. Doi:10.22034/amfa.2020.1881227.1317

 

[40] Michailova, J., Mačiulis, A., and Tvaronavičienė, M., Overconfidence, risk aversion and individual financial decisions in experimental asset markets, 2017, Economic Research, 30(1), P.1119–1131. Doi:10.1080/1331677X.2017.1311234.

 

[41] Nofsinger, J. R., Investment Madness: How Psychology Affect Your Investing and What to Do About It. USA: Pearson Education.

 

[42] Nourbakhsh, A., Asgari, Gh., Nasiri, R., Efficiency in the developing markets: empirical evidence from Tehran Stock Exchange, Quarterly of Accounting and Auditing Review, 2010, 17 (62), P.103-116. (in Persian)

 

[43] Nwidobie and Barine Michael., The Random Walk Theory: An Empirical Test in The Nigerian Capital Market, Asian Economic and Financial Review, 2014, 4(12), P.1840-1848.

 

[44] Pandey, S., Samanta, A., Weak-Form Efficiency in Indian Stock Market Index; Ijmrr, 2016, 6(7), P.904-913.

 

[45] Porto, R. B., The commercial cycle from the viewpoint of operant behavioral economics: effects of price discounts on revenues received from services, Revista de Administração(São Paulo), 2016, 51(3), P.310-322.

 Doi: 10.1016/j.rausp.2016.06.005

 

[46] Rathnayaka, R., Seneviratna, D., Wei, J., and Arumawadu, H., A hybrid statistical approach for stock market forecasting based on Artificial Neural Network and ARIMA time series modelsInternational Conference on Behavioral, Economic and Socio-cultural Computing (BESC), 2015, P.54-60. Doi:10.1109/BESC.2015.7365958

 

 [47] Roberts, H., Statistical versus clinical prediction of the stock market, Unpublished manuscript, Center for Research in Security Prices, University of Chicago 1967.

 

[48] Sadi, R., Asl, H. G., Rostami, M. R., Gholipour, A., and Gholipour, F., Behavioral finance: The explanation of investors’ personality and perceptual biases effects on financial decisions, International Journal of Economics and Finance, 2011, 3(5), P.234–241. Doi:10.5539/ijef.v3n5p234

 

[49] Samuelson, P., Proof that Properly Anticipated Prices Fluctuate Randomly, Industrial Management Review, 1965, 6, P.41-49. Doi:10.1142/9789814566926_0002

 

[50] Sharma, A. J., Dibrugarh, A. I., Understanding Cognitive Dissonance-The Behavioural Finance Principle, International Journal of Commerce, Business and Management, 2014, 3(1), P.18–27.

 

[51] Shefrin, H., Statman, M., The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence, In: The Journal of Finance, 1985, 40(3). Doi:10.2307/2327802

 

[52] Shiller, R. J., From efficient markets theory to behavioral finance, Journal of economic perspectives, 2003, 17(1), P.83-104. Doi:10.1257/089533003321164967

 

 [53] Shehzad, S. J., Ali, P., Saleem, F., Ali, S., and Akram, S., Stock Market Efficiency: Behavioural or Traditional Paradigm? Evidence from Karachi Stock Exchange (KSE) and Investors Community of Pakistan, 2013.

 

[54] Siami-Namini, S., Tavakoli, N., Namin, A. S., A comparative analysis of forecasting financial time series using Arima, lstm, and bilstm, 2019, arXiv preprint arXiv,1911.09512.

 

 [55] Suresh, A., Understanding behavioral finance through biases and traits of trader vis-à-vis investor, Journal of Finance, Accounting and Management, 2013, 4(2), P.11–25.

 

[56] Tajdini, S., Jafari, F., Lotfi Ghahroud, M., Unusual behavior: Reversed Leverage Effect Bias, Journal of Mathematics and Modeling in Finance, 2020, 1(1), P. 15. Doi:10.22054/JMMF.2020.54928.1016

 

[57] Tajdini, S., Mehrara, M., and Taiebnia, A., Investigating the fluctuations of exchange rate based on monetary-behavior approach, International Journal of Finance and Economics, 2021, 10(3),19.‏ Doi:10.1002/ijfe.2473

 

[58] Tas, O., Guleroglu Atac, C., Testing Random Walk Hypothesis for Istanbul Stock Exchange, 5th Global Business Research Congress, 2019, 9, P.48-53. Doi:10.17261/Pressacademia.2019.1063

 

[59] Tehrani, R., Mirlohi, S. M., Mehrara, M., and Ghahroud, M. L., The effect of contractual rewards on non-maturing deposits and bank funding stability (Case Study: Bank Mellat), Asset Management and Financing, 2019, 7(1), 45-62. Doi:10.22108/amf.2018.111350.1262

 

[60] Tehrani Reza Ansari, H., Saran, A., Analysis of return to mean phenomenon in Tehran Stock Exchange using variance ratio test, Accounting and Auditing Review, 2008, 15(54). (In Persian)

 

[61] Tehrani, R., Tajdini, S., Abbasian, E., Mirlohi, M., Measure the level of adherence to the random walk Theory in Various Industry Indices Using the Markov Switching Model, Financial Management Strategy, 2021, 9(1), -. Doi:10.22051/jfm.2019.19604.1626

 

[62] Thaler, R., Toward a positive theory of consumer choice, Journal of Economic Behavior and Organisation, 1980, 1(1), P.39–60. Doi:10.1016/0167-2681(80)90051-7

 

[63] Thaler, R. H., From cashews to nudges: The evolution of behavioral economics, American Economic Review, 2018, 108(6), P.1265-87. Doi:10.1257/aer.108.6.1265

 

[64] Tversky, A., Kahneman, D., Judgment under uncertainty: Heuristics and biases, 1974, Science. 185 (4157), Doi:10.1126/science.185.4157.1124

 

[65] Tversky, A., Kahneman, D., The framing of decisions and the psychology of choice, Science. 1981 Jan 30., 211(4481), P.453-8. Doi:10.1126/science.7455683.

 

 [66] Uzar, C., and Akkaya, G. C., The Mental and Behavioural Mistakes Investors Make, International Journal of Business and Management Studies, 2013, 5(1), P.120-128.

 

[67] Wang, L., Zou, H., Su, J., Li, L., and Chaudhry, S., An ARIMA‐ANN hybrid model for time series forecasting, Systems Research and Behavioral Science, 2013, 30(3), P.244-259. Doi:10.1002/sres.2179

 

[68] Wong, W. K., Review on behavioral economics and behavioral finance, Studies in Economics and Finance, 2020, 6(2), P.32. Doi:10.1108/SEF-10-2019-0393

 

[69] Zhu, Z., The random walk of stock prices: evidence from a panel of G7 countries, Applied Economics Letters, 1998, 5, P. 411-3. Doi:10.1080/135048598354528

 

[70] Zhou, R., and Pham, M. T., Journal of consumer research. Serials Review, 1984, 10(2), 34.

Doi:10.1016/0098-7913(84)90029-7