Manifesting overconfidence bias and disposition effect in the stock market

Abstract

The study investigates the influence of overconfidence bias and disposition effect among the investors in the Indian stock market by examining these biases' presence on individual stocks in the index. The study also aims to determine which of the two biases, overconfidence or disposition, dominates the market. Security-wide Vector Autoregression (VAR) model, impulse response function, and nonlinear analysis are used to inspect the presence of overconfidence bias and disposition effect in the market. The study's findings have shown both biases are present in the Indian market, with the former being predominant. Knowledge of the two effects in the market can be exploited by the investors to maximize their returns from the market. Simultaneously, administrators can take preventive measures before market turbulence goes beyond control, damaging the investors.