An empirical analysis of overconfidence behaviour in the Indian ETF market

Barkha Dhingra and Mahender Yadav

International Journal of Revenue Management, 2024, vol. 14, issue 1, 72-94

Abstract: One of the most notable advances in contemporary financial markets is the creation of exchange-traded funds (ETFs). The rising demand for this asset class may induce overconfidence in investors, which may endanger the stability of financial markets. Overconfidence bias is an inclination to overestimate one's own abilities and underestimate their error variance while valuing securities. The present study aims to investigate the presence of the overconfidence bias in the Indian ETF market using a sample of 12 equity ETFs in both pre and during the pandemic period. Vector autoregression (VAR) and impulse response functions (IRFs) are used to understand the relation between past returns and the current transaction volume of the data. The study found that investors in ETF markets are overconfident, even in the crisis phase. This study contributes by addressing the knowledge gap on the overconfidence bias in the Indian ETF market. It sheds light on how the Indian banking industry maintained its faith in the investors' lobby. The findings of this research study have implications for investors, asset management companies, regulators, and policymakers.

Keywords: overconfidence; behavioural bias; behavioural finance; COVID-19; vector autoregression; impulse response function; IRF; exchange-traded funds; ETFs. (search for similar items in EconPapers)
Date: 2024
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