Behavioral finance: the analysis of investor behavior based on belief and feeling and the investor rationality towards LQ 45 stocks

  • 1417 Views
  • 215 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

This research analyzes behavioral finance, especially the behavior of investors in Yogyakarta, Indonesia Region. The performance of investor behavior is examined based on the LQ 45 stocks return on Indonesia Stock Exchange and questionnaires that are spread out to five securities agents in Yogyakarta.
The performance of LQ 45 stocks return is compared to the questionnaire analysis in the “Belief” part at the first and second stages. The first result shows that LQ 45 stocks are profitable. It can be seen from the average return of the stocks that it has positive value and is statistically identical with the LQ 45 index return. This result is in line with the investors’ opinion that LQ 45 stocks are profitable. The second result shows that most of LQ 45 stocks are profitable and give high return. But, this result is also contrary to the opinion of investors towards traditional finance paradigm that investors still believe “high risk – high return, low risk – low return”. Although most of LQ 45 stocks are considered as low risk stocks, many investors prefer to choose LQ 45 stocks. It means that the traditional finance paradigm has weakness. It is proven that investors sometimes act irrationally.
The third and fourth stages of the study are aimed to analyze the relationship between feeling and belief towards frequency of transaction each day based on the questionnaire using regression analysis. The result shows that there is significant relationship between feeling and frequency of transaction each day.

view full abstract hide full abstract
  • JEL Classification (Paper profile tab)
    G02, G11
  • References
    14
  • Tables
    6
  • Figures
    0
    • Table 1. Average return for each LQ 45 stock and LQ 45 index
    • Table 2. Independent sample t-test result between average LQ 45 stock return and average LQ 45 Index return
    • Table 3. Standard deviation for each LQ 45 stock and LQ 45 index
    • Table 4. Descriptive statistics
    • Table 5. Model summary
    • Table 6. Coefficient
    • Abreu, Dilip, & Marcus, K. B. (2002). Synchronization Risk and Delayed Arbitrage. Journal of Financial Economics, 66(2-3), 341-360.
    • Abreu, Dilip, & Marcus, K. B. (2003). Bubbles and Crashes. Econometrica, 71(1), 173-204.
    • Barber, B. M., & Odean, T. (2000). Trading is Hazardous to Your Wealth: the Common Stock Performance of Individual Investors. Journal of Finance, 55(2), 773-806.
    • Barber, B. M., & Odean, T. (2002). Online Investors: Do the slow die first? The Review of Financial Studies, 15(2), 455-487.
    • Coval, J., & Shumway, T. (2000). Do behavioral biases affect prices? Working Paper (University of Michigan, Ann Arbor, MI).
    • Delong, J. B., Shleifer, A., Summers L., & Waldmann, R. J. (1990). Positive Feedback Investment Strategies and Destablizing Rational Speculation. The Journal of Finance, 45(2), 379-395.
    • Edelen, Roger M., & Jerold, B. Warner (2001). Aggregate Price Effects of Institutional Trading: A study of Mutual Fund Flow and Market Returns. Journal of Financial Economics, 59(2), 195-220.
    • Friedman, M. (1953). The Case of Flexible Exchange Rates. Essays in Positive economics. Chicago: University of Chicago Press.
    • Grinblatt, M., & Han, B. (2001). The disposition effect and momentum (Working Paper) University of California, Los Angeles, CA.
    • Markus, G., & Martin, W. (2007). Which Past Return Affect Trading Volume.
    • Goetzmann, William, & Massimo, M. (1999). Index Funds and Stock Market Growth. (Working paper). Yale University.
    • Odean, Terrance (1999). Do Investors Trade Too Much? American Economic Review, 89(5), 1279-1298.
    • Shefrin, H., & Statman, M. (1985). The Disposition To Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. The Journal of Finance, 40(3), 777-790.
    • Statman, M, Thorley, S, Vorkink, K. (2006). Investor Overconfidence and Trading Volume. The Review Financial Studies, 19(4), 1531-1565.
Download Preview
Close
Investment Management and Financial Innovations
Investment Management and Financial Innovations