Behavioural Biases as Determinants of Stock Market Volatility: Evidence from the Indian Equity Market
DOI:
https://doi.org/10.26821/ijsrc.14.9.2026.140903Keywords:
behavioural finance, stock market volatility, investor behaviour, market sentiment, investor decision-makingAbstract
Stock market is one of the principal platforms for buying and selling of securities by investors and traders. Conventional financial theory states that rational investors and security prices reflect the information efficiently. Conversely, emerging theories in behavioural finance states that cognitive and emotional biases lead investors to systematically depart from rational decision making. Such deviations have implications for asset prices, trading behaviour, and aggregate market volatility. The present paper studies the effect of behavioural biases like overconfidence, herding, loss aversion, anchoring and representativeness on the stock market volatility in the Indian equity market. The research provides an empirical framework based on market- and investor-level indicators. The study uses secondary data based quantitative research design and sample consists of daily observations of the Indian equity market for a ten-year time frame from 2016-2025. The NIFTY 50 and the BSE Sensex are the main Indian equity indices and the main market proxies. Volatility is modelled as a function of rolling standard deviations, return dispersion, GARCH-family measures or realized-volatility indicators, whereas proxies for behavioural effects are based on trading volume, turnover, investor-flow data, survey responses and market sentiment indicators. The basic idea is that behavioural biases generate short-term volatility in correlated trading, overreaction to news, and asymmetric reaction to gains and losses. The paper also explores the heterogeneity of the effect of behavioural biases across market conditions, in particular, during periods of financial stress and rapid market appreciation. The study concludes that stock volatility is highly impacted by behaviour biases of investors.
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