Overconfidence Bias Of Investors’ Investment Decisions On Ghana Stock Exchange
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University of Ghana
Abstract
The Efficient Market Hypothesis (EMH) postulates that all publicly available information on
any firm’s stock future performance is incorporated in the firm’s stock price such that the
actual price of the stock is equal to its intrinsic value. The EMH is argued to lead to “correct
prices” which creates the necessary environment for efficient allocation of economic
productive scarce resources. The documentation of empirical evidence of weak-form
inefficiency on most stock markets especially Africa, has received much attention by
regulators, researchers, investors and many other players in the financial industry. The Ghana
stock market, for instance, is documented in the literature to be weak-form inefficient.
In this study, the researcher turns to behavioural finance to test the rationality of the investors
on Ghana stock market since the rationality assumption is one of the pillars upon which
market efficiency is built. To test the rationality of the market participants, overconfidence
behavioural bias is used as a conditional rationality test proxy. The concentration on
overconfidence bias does not suggest that overconfidence is the only bias worth considering
but it is due to the fact that it is reported in the literature to be one of the robust psychological
behavioural biases.
Overconfidence is the act of having a mistaken assessment and believing in these assessments
too strongly. To test the overconfidence bias, a market-wide Vector Autoregressive (VAR)
model and its associated impulse response function is used to investigate the lead-lag
relationship between market returns and market trading volume. Also, granger-causality test
was performed to test the causality between returns and trading volumes. This study uses the
Ghana Stock Exchange All-Share index (GSE-ASI) and the Ghana Stock Exchange
Composite Index (GSE-CI) monthly returns data. In addition, the monthly trading volume,
monthly returns volatility, interest rate and inflation data from 2000 to 2015 are used for the
study.
The findings reveal a significant impact of past market returns on current trading volumes.
The impulse response function analysis also showed that the response of trading volume to a
shock of market return residual remains highly positive and significant at lag one and two.
The granger causality reveals unidirectional causality running from returns to trading
volumes. The empirical findings finally demonstrate that market participants on GSE exhibit
conditional irrationality (overconfidence bias as proxy) in their investment decisions.
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Thesis (MPhil)