A study of behavioral finance in the Indian stock exchange

Ace p.

Order the writing of a tailor-made Finance Case study

Free quote online

Case study Format .doc

A study of behavioral finance in the Indian stock exchange

Download

Read an extract

Reader
Abstract
Contents
Extract

Abstract

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case. Peter L. Bernstein in Against The Gods states that the evidence "reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty." A field known as "behavioral finance" has evolved that attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process. Many researchers believe that the study of psychology and other social sciences can shed considerable light on the efficiency of financial markets as well as explain many stock market anomalies, market bubbles, and crashes. As an example, some believe that the out performance of value investing results from investor's irrational overconfidence in exciting growth companies and from the fact that investors generate pleasure and pride from owning growth stocks. Many researchers believe that these human flaws are consistent, predictable, and can be exploited for profit.

Introduction
An overview of behavioral finance
1. Objectives of the study
2. Sources of information
3. Limitations of the study
Profile of Hyderabad Stock Exchange
Investing in Securities Market
Industry profile
1. Historical evolution
2. Definitions
3. Scope and implications
A study of various biases or heuristics
1. Applicability of such biases in Indian stock market
Application of behavioral finance
Bibliography
Conclusion

Get this table of contents for free after login.

Extract

[...] Clearing House: The Exchange set-up a Clearing House to collect the Securities from all the Members and distribute to each member, all the securities due in respect of every settlement. The whole of the operations of the Clearing House were also computerized. Inter Connected Market System (ICMS): The Hyderabad Stock Exchange was the convener of a Committee constituted by the Federation of Indian Stock Exchanges for implementing an Inter-connected Market System(ICMS) in which the Screen Based Trading systems of various Stock Exchanges was inter-connected to create a large National Market. SEBI welcomed the creation of ICMS. [...]

[...] Cr) Opens Closes Offer Price List Price Var CHAPTER 8 APPLICATION OF BEHAVIORAL FINANCE The first application concerns inflation and the stock market. Below, is the list of some specific assumptions about a hypothetical firm, and the question is, much is the equity of this firm worth?” Assumptions: The inflation rate is and the equity risk premium is zero, so the nominal cost of capital is 10% real cost of capital of The firm wants to keep the real value of its debt unchanged, so it must increase the nominal amount of debt by each year. [...]

[...] While behavioral finance as a subject has been known for a long time, earlier studies were mostly focused on the explanation of the irrational behavior of the stock markets and their participants. The attention of more and more researchers is now extending to the explanation of the puzzles in corporate finance, like IPO under pricing, tendency of managers to go for mergers and acquisition, the way firms maintain or change their dividend payout ratios and so on. One of the most widely known biases of managers that show up repeatedly in mergers and acquisition is the Hubris spirit. [...]

[...] CHAPTER 7 APPLICABILITY OF THESE BIASES IN INDIAN STOCK MARKET During the technology boom in 1999-2000 many second rung Technology, Media, Telecom (TMT) companies went for public issues and public blindly subscribed for these issues in anticipation that being in the same industry they might also be good. But, now many of these second rung companies are trading at below the issue price or they are not listed at all. Table 1 shows the list of second rung companies that went for public issues. [...]

[...] Floating of a subsidiary company for the membership of major stock exchanges of the country The Exchange has already floated a Subsidiary Company in the name and style of M/s HSE Securities Limited for obtaining the Membership of NSE and BSE. The process of acquiring the membership of NSE has already been completed and SEBI was kind enough to grant its registration to M/s HSE Securities Limited. Some of the members have also filed their applications seeking Sub-broker ship with M/s HSE Securities limited and the process of registration is in process. [...]

doc