Optimism and Pessimism in Indian Equity Market

What is it about?

Behavioral biases have a crucial role to play in the stock market. With the advances in financial literature, these biases have been given special recognition in their ability to influence stock prices. Optimism and pessimism are two such potent biases that prevail in the financial markets which have the ability to overvalue or undervalue the stocks considerably. The present paper provides a mechanism to estimate these biases and thereby finding their impact in the stock markets.

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Why is it important?

The behavioral biases have been historically studied with the help of survey method which provides a real time information. However, this method is constrained to a particular space and time. further it cannot be generalized. To mitigate this, the present paper provides a statistical method of estimation which quantifies the optimism and pessimism biases in the Indian context. This method can be easily used to calculate the level of optimism and pessimism during any point of financial history and thereby drawing inferences from it.