THE ROLE OF BEHAVIORAL FINANCE IN STOCK MARKET FLUCTUATIONS: EMOTIONS VS. RATIONALITY
DOI:
https://doi.org/10.32782/ecovis/2024-1-4Keywords:
stock market, stock index, behavioral finance, cognitive biases, investor behavior, efficient market hypothesis, market volatility, financial decision-makingAbstract
In today's environment of increased financial market volatility and the growing influence of non-financial factors on investment decisions, interest in behavioral finance is steadily rising. The traditional Efficient Market Hypothesis (EMH) fails to fully explain market anomalies, mass emotional reactions, and irrational investor strategies. This issue becomes especially relevant in low-liquidity markets such as Ukraine's stock market. The purpose of this article is to identify the impact of psychological factors and cognitive biases on the dynamics of stock indices, particularly under conditions of instability, information overload, and uncertainty. The study employs comparative analysis, systematization of literature on behavioral finance, statistical analysis of the PFTS and UX stock index dynamics for the period 2020 – 2023, as well as case analysis of psychological effects in real market situations. The research examines key cognitive distortions that influence investor behavior, including confirmation bias, anchoring, overconfidence, herding, loss aversion, framing, and the illusion of control. The findings demonstrate that such biases can lead to distorted market pricing, index under- or overvaluation, and the emergence of speculative waves. Based on the Ukrainian PFTS and UX indices, the article illustrates that sharp market fluctuations are not always caused by fundamental factors but often depend significantly on investor sentiment. This study enhances the understanding of the relationship between emotional factors and market indicators, and expands the approach to analyzing stock indices by incorporating the psychological behavior of market participants. The results may be useful to investors, analysts, and financial intermediaries for improving risk assessment strategies and decision-making processes that take into account both economic and behavioral components.
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