Anchoring Bias and Financial Security: A Study of KSE Markets

Abstract

Business anomalies such as overreaction and underreaction are affected by a variety of psychological causes. The use of anchors or baseline values, known as the anchoring effect, causes market underreaction and overreaction. This research used nearness to 52-week high and nearness to historical high as proxies for under and over-reaction, respectively, to analyze the psychological causes for under and over-reaction. On the KSE-100 and KSE-30, the findings revealed that proximity to the 52-week peak positively predicts future returns, whereas proximity to the historical high negatively predicts future returns. KSE-100 was used for the key time series research., while KSE-30 was used for rigorous testing. There is no substantial gap between the KSE-100 and KSE-30 scores, according to the findings. Similarly, the three macroeconomic variables used as control variables are the exchange rate, inflation rate, and interest rate in order to provide a more robust model of strong prediction capacity. The findings revealed that proximity to the 52-week maximum and proximity to the historical high, as well as other macroeconomic factors, had a forecast capacity of around 62 percent. Similarly, focused on volatility clusters, the GARCH (1, 1) model was used to measure the association between potential and past returns. The results show that in the GARCH (1, 1) model, there is a first order autoregressive function. The findings also show that when the study's individual variables are moved from everyday to annual horizons, their predictive capacity decreases.