Behavioral Biases And Market Efficiency: Testing Overreaction And Reversal Effects In NSE 500 Stocks

Abstract

This study looks at whether there are behavioural biases in the Indian stock market, especially overreactions and the impacts that follow them, by looking at the historical return data of NSE 500 companies. The Efficient Market Hypothesis (EMH) is an example of traditional financial theory that says stock prices take into account all available information, making it impossible to consistently beat the market. Behavioural finance says that psychological biases and irrational behaviour by investors may cause stock returns to be different from what they should be.

This research looks at whether stocks that have very high or poor returns tend to go back to their previous levels, which might indicate that investors are overreacting.  Using a portfolio-based method, stocks are judged based on how well they have done in the past during certain time periods. The upper and lower deciles, which show the best and worst results, are put into winner and loser portfolios, respectively. These portfolios are then kept for different amounts of time to look at how returns change after they are formed. The study looks at whether loser portfolios always do better than winning portfolios, as the overreaction hypothesis suggests they should.

The empirical results of this research try to find out whether the Efficient Market Hypothesis (EMH) is true in the Indian stock market and if investors' actions cause temporary price changes. The NSE 500 is a comprehensive and representative index that the research uses to look at market-wide efficiency in depth. The findings are expected to impact investors, portfolio managers, and regulators by showing how much behavioural biases affect asset prices in emerging countries like India.