ABSTRACT
Financial analysts have long puzzled over the behavior of investors towards trading in the stock market. This chapter attempts to identify and analyze the most popular reasons for high levels of trading from the perspective of behavioral finance. The study posits that overconfidence and the disposition effect are amongst the greatest contributing biases. Overconfidence refers to overestimating one’s own precision towards the stock market; the disposition effect is the tendency among investors to sell stocks that have appreciated in price. The study segregated the impact of these two biases on trading volume using a vector autoregressive model (VAR) and impulse response function with a data set of a sample of Nifty 50 stocks for a period of nine years (2009–2018). The empirical findings confirmed the presence and impact of overconfidence and the disposition effect on trading volume in the Indian stock market. Trading volume adversely affects stock prices in ways that may not be justified by their price/earnings (P/E) ratio, resulting in misvaluation of stocks.
