Solidity and Immutability of Behavioural Finance Theory in Capital Market Investment: A Global Perspective

Abstract

This study evaluated the argument that the capital market is efficient such that all information from both the past, present, and unpublished have already been reflected in the market price of security as a guide for investors in the market and that the behaviour of the same investors could affect the performance of the market. To address the above concern, the researcher employed various suitable finametric tools such as Normality/Random Walk test, Variance ratio test and EGARCH models etc., to analyze the daily historical data from prominent capital markets each from all the continents around the world. From the results of these tools employed, none of the markets under study follow the random walk theory within the scope of the study. The results of EGARCH and volatility clustering tests also revealed that all the countries under study exhibited property of stock returns distribution called volatility clustering or volatility pooling, a kind of heteroscedasticity, suggesting nonconformity of the random walk theory. The failure of the various results to corroborate the random walk theory shows that investors are rational and unpredictable. These results have rightly positioned the behavioural finance theory as a veritable tool that can guide economic agents on capital market investment decisions. That means the behaviour of investors makes share prices deviate from the economic fundamentals or assumptions. Considering the above findings, the researcher boldly advocates for a paradigm shift to behavioural finance theory, where emotions and psychology or mindsets of investors influence investment decision-making process and financial markets, hence a veritable guide for decision on stock market investments. Therefore, the researcher went ahead to suggest that emotional and psychological checks be carried out on all investors of the stock market, mostly when an innovation or new policy is promulgated.

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