Excess Volatility in the Tunisian Stock Market: Explanation by Behavioral Finance

Abstract

In this paper, we tried to show the existence of excess volatility of stock prices in the Tunisian stock exchange during the period 2000 - 2017, by applying the variance bounds of Shiller. We used data on daily closing prices and the transaction volume of 22 companies listed on Tunisian Financial market during the period 2016/2017 to identify the relationship between over confidence bias and the Excess Volatility via the Granger causality test. Based on Chuang and Lee’s approach, we studied the effect of the excess confidence component on volatility by the E-GARCH Model (1.1). Our results show that high market volatility resulted from overconfident investors.

Adaptive Market Hypothesis And Overconfidence Bias

“…In order to construct the overconfidence and non-overconfidence series, we will apply the transaction volume decomposition method used by Chuang and Lee (2006). This idea is also used by several researchers, such as (Boujelben et al, 2009;Naoui and Khaled, 2011;Jlassi et al, 2014;Mushinada and Veluri, 2018;Boussaidi, 2020;Chkioua, 2021). The idea of this method is to distinguish between trading volume that is related to investor overconfidence levels due to historical market returns and trading volume that is not associated with investor overconfidence.…”