TRADING BEHAVIOR AND STOCK MARKET INVESTMENT DECISION: EMPIRICAL EVIDENCE FROM PAKISTAN STOCK MARKET

Abstract

The aim of present study is to examine the impact of behavioral biases such as overconfidence, optimism, pessimism, and rational expectations of investors on trading volume in the stock market of Pakistan. Daily data was taken from the official website of the Pakistan Stock Market (PSX). The data period comprises of January 2019 to March Unit root stationary, Regression models, and GARCH (1,1) models tests were used. Results reveals that significant positive impact of confidence and optimism, while pessimism negatively impacts on daily trading volume. Whereas confidence and optimism positively but insignificantly impact Monday’s daily exchange volume. Further results demonstrate that optimism has a positive significance, and confidence and rational expectation show a positive but insignificant impact on Tuesday’s daily trading volume. Confidence and optimism have positive impacts on Wednesday’s daily trading volume and Pessimism has a negative influence on Wednesday’s daily trading volume. The study also confirms that a significant positive impact of optimism and rational expectations has a significant negative impact on Thursday’s daily trading volume. GARCH (1,1) indicates that the lagged trading volume has significantly negative impacts on today’s trade volume and only pessimism has significant positive influence in trade volume. Further GARCH (1,1) extended model demonstrated that confidence has positive impact a trading volume volatility and pessimism has negative impacts on trading volume volatility. This research explores how behavioral biases like confidence, optimism, and pessimism influence investment decisions.