6533b823fe1ef96bd127f679

RESEARCH PRODUCT

Effects of Behavioural Finance on Emerging Capital Markets

subject

description

Abstract A recent common view of finance experts is that it is becoming increasingly difficult to understand how the economy as a whole works. Although the efficient market theory might be considered an ideal model enabling the interpretation of market behavior, it has begun to lose ground, and the rationality hypothesis failed to explain the excessive volatility of the returns and trading volume recorded on both developed capital markets and emerging ones. Adding the behavioral finance perspective to the equation can help us to understand better how market agents will react. In this article, we investigate the factors that may explain the trading volume evolution on two emerging capital markets, Romania and Brazil. We analyze the impact of both investors who ground their trading behavior on rational expectations and investors who show behavioral errors as independent variables on the trading volume as dependent variable. The period under analysis covers four years, from June 2009 to June 2013, and includes the daily values of the most important indices traded on both markets, i.e. BET for Romania and IBOVESPA for Brazil, and the daily trading volume for each of the two indices. The results indicate that trading is influenced by the investors’ irrational behavior. Thus, the rationality hypothesis can be rejected for both capital markets.