Behavioral Finance Models and Behavioral Biases in Stock Price Forecasting

Document Type: Research Paper

Authors

1 Department of Accounting and Finance, Humanities Faculty, Maragheh Branch, Islamic Azad University, Maragheh, Iran

2 Department of Accounting and Finance, Humanities Faculty, Maragheh Branch of Islamic Azad University, Maragheh, Iran

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.

Keywords

Main Subjects


[1] Badri, A., Sadeghi, M., Effect of different days of week on returns, volatility and volume of transactions in Tehran Stock Exchange. Management Message, 2005, 17, P.55-83. (In Persian)

[2] Birau, f. R., The meanings of efficient market paradigm in the context of emerging capital markets. An analysis of weak-form efficiency on the Bucharest Stock Exchange, The International Conference,, competitiveness And Stability In The Knowledge Based Economy,  The Faculty of Economics and Business Administration, University of Craiova, Romania, 4-5 November 2011.

[3] Birnberg, J.,  A Proposed Framework for Behavioural Accounting Research. Journal Behavioural Research in Accountin. 2011, 23, P.1-43. DOI: 10.2308/bria.2011.23.1.1

[4] Brinberg, J., Luft, J., Shields, M., Hand Book of Management Accounting Research. Elsevier Ltd. 2007.

[5] Daniel, K., Titman, S., Market reaction to tangible and intangible information. Journal of Finance. 2006, 4, P.1605-1643. DOI: 10.3386/w9743

[6] Darabi, R., Chenary-e Bukat, H., Valikhani, M., Dimensions and Approaches of Behavioral Finance Theory, Iranian Accounting and Auditing Studies, 2016, 5. (In Persian)

[7] Eslami-e Bidgoli, G., Kordlouy, H., Behavioral Finance: Transition from Standard Financial to Neurofinance, Journal of Financial Engineering and Portfolio Management, 2010, 1, P.19-36. (In Persian)

[8] Frydman, C., Camerer, C., The Psychology and Neuroscience of Financial Decision Making. Journal Trends in Cognitive Sciences, 2016, 20.

[9] Fernandes, J., Pena, J., Benjamin, T., Behavior finance and estimation risk in stochastic portfolio optimization, banco centeral do brasil, 2009, Working paper.184.

[10] Golami Jamkarani, R., Mokhtari, D., Effect of Conservative Reporting on Investors Opinion Divergence at Time of Earnings Announcement. Journal Advances in mathematical Finance & applications. 2018, 3, P.81-95. (In Persian)

[11] Hamiltom, J. D.,  A new approach to the economic analysis of non-stationary time series and the business cycle, Econometrica, 1989, 57, P.357- 384. DOI: 10.2307/1912559

[12] Hellmann, A., The role of accounting in behavioural finance. Journal of Behavioural and Experimental finance. 2016, 9, P.39-42. DOI: 10.1016/j.jbef.2015.11.004

[13] Hirshleifer, D. Investor psychology and asset pricing. Journal of Finance, 2002, 56, P.1533-1597.

[14] Hui-chu, S.,  Investor mood and Financial markets. Journal of Economic Behaviour & organization, 2010, 76, P.267-282. DOI: 10.1016/j.jebo.2010.06.004

[15] Hunton, J. E., Toward an understanding of the risky choice behavior of professional financial analysts, Journal of Psychology and Financial Market. 2005, 20, P.182-189. DOI: 10.1207/S15327760JPFM0204_2

[16] Jagongo, A., Mutswenje, V.,  A surrey of the Factors Individual Investors at the NSE International Journal of Humanities and Social Science,2014, 4.

[17] Keshavarz-e Haddad, G., Rezaei, M., Testing and analyzing the existence of herd behavior among institutional investors of the Iran Stock Exchange. Quarterly Journal of Economic Research, 2010, P.103-138. (In Persian)

[18] Khademi-e Grashi, M., Ghazizadeh, M.,  Investigating the Factors Affecting the Decision-making of Shareholders in Tehran Stock Exchange based on the Structural Equation Modeling, Daneshvar Journal of Research, Shahed University of Medical Sciences, 2007, 23. (In Persian)

[19] Levin, S., Zajac, E., The social Life of Financial. Journal Illinois, Wesleyan University.2001, 23, P.1-8.

[20] Malekian, E., Fakhari, H., Ghasemi, J., Farzad, S., Predict the Stock Price of Crash Risk by Using Firefly Algorithm and Comparison With Regression. Journal Advances in mathematical Finance & applications. 2018, 3, P.43-58. (In Persian)

[21] Mehrani, S., Nounahal-e Nahr, A., Investigating blow-the-expectation behavior of investors in Tehran Stock Exchange, Journal of Accounting and Auditing, 2008, 54. (In Persian)

[22] Menkhoff, L., Nikiforow, M., Professional endorsement of behavioral finance: Dose it impact their perception of markets and themselves? Journal of Economic Behaviour & Organization, 2009, 71, P.318- 329. DOI: 10.1016/j.jebo.2009.04.004

[23] Opera, C., Tanasescu, C., Effect of Behavioural Financial on Emerging Capital Markets. Procedia Economics and Finance Journal, 2014, 15, P.1710- 1716. DOI: 10.1016/S2212-5671(14)00645-5

[24] Rahnemay-e Roudposhti, F., Zandieh, V., Behavioral Finance and Neurofinance (New Financial Paradigm) from Theory to Practice, Islamic Azad University Publications, Organization of Printing and Recruitment. 2012, (In Persian)

[25] Raei, R., Fallahpour, S., Behavioral Finance, Different Approaches in the Area of Finance, Financial Research, 2004, 18, P.77-106. (In Persian)

[26] Ritter, J. R., Behavioral finance, Pacific-Basin Finance Journal. 2003, 11, P.429-437. DOI: 10.1016/S0927-538X(03)00048-9

[27] Shahrabadi, A., Yousefi, R., An Introduction to Behavioral Finance, Stock Exchange Journal, 2007, 9, P.51-70. (In Persian)

[28] Samadi, S., Nasrollahi, Z., Zahedmehr, A., Testing the Efficacy and price bubble in Tehran Stock Exchange using the filter rule and CAPM pattern, Quarterly Economic Reviews, 2007, 4, P.91-113. (In Persian)

[29] Thaler, R. H., The end of behavioral finance, Financial Analyst Journal, 1993, 55, P.12-17. DOI: 10.2469/faj.v55.n6.2310

[30] Wang, l., Shi, K., Xiafan, H., Psychological mechanisms of investor in Chinese stock market. Journal of Economic Psychology, 2006, 27, P.762- 780. DOI: 10.1016/j.joep.2006.06.007