Understanding Investor behavior and it's implications on Capital Markets - The Indian Context

The paper aims to study the dynamic investor behavior and how it helps explain variation in stock returns. We propose a dynamic factor model to extract distinct latent factors representing fluctuations in asset returns due to changes in fundamentals and investor behavior. We study investor behavior under two broad categories, market-wide sentiment and herding. Our analysis suggests that both factors significantly impact the asset pricing and show varied volatilities across the sample. The model also ascertains empirical characteristics of the identified behavioral factors.