Study on investor behavioural biases financial literacy and volatility index

Abstract

The investors in equity market make decisions in complex situations as they are exposed to national and international news market information announcements and policy changes on regular basis Investor behaviour can be defined as how they receive and interpret information in the equity market and take decisions Finance theories have classified the investor behaviour on the basis of two competing theories of rationality and irrationality The rational expectations hypothesis relaxes the assumption that investors have access to complete knowledge of the economy and the theories on behavioural biases relaxes the assumption of objective treatment of available and potential information Investor behaviour studies have been directed in explaining investor decisions by combining the topics of psychology and investing in financial markets on a macro level and examining the decision process of individuals and groups at a micro level In this context this study explores the investor behaviour around macroeconomic announcements by examining the behaviour of Volatility Index VIX to capture the uncertainty of the investors and the impact of behavioural biases and competence of investors on their decisions The VIX popularly quoted as the investor fear gauge measures the uncertainty in market caused due to fear among investors Macroeconomic news are one of the key drivers of stock returns and causes financial market fluctuations Global studies on the behaviour of VIX during macroeconomic announcements have shown that macroeconomic announcements causes uncertainty in the equity markets The Indian Volatility Index IVIX was introduced in India on March 2 2009 There are few studies on the reaction of IVIX to Indian macroeconomic announcements and these studies have documented mixed evidence and the IVIX does not always revert to its normal level newline