Misvaluation and behavioral bias in the Brazilian stock market

Abstract

ABSTRACT The study sought to apply the model developed by Gokhale et al. (2015) to identify the existence of overreaction and behavioral biases in the Brazilian stock market and analyze its performance as an investment strategy on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA) in the short term and long term, as well as test its robustness with time window simulations. The impacts of behavioral finance on capital markets can affect economic decisions, perpetuate or increase asset pricing anomalies, and in more extreme and persistent situations contribute to the formation of bubbles that can compromise the entire financial system of a country. The study pioneers an innovative methodology in the Brazilian stock market for identifying behavioral biases and obtaining abnormal returns and higher returns than the Ibovespa. The research uses the model developed by Gokhale, Tremblay, and Tremblay (2015) in three samples with quotations data for Brazilian publicly-traded companies that compose the Ibovespa and IBrA in the period from 2005 to 2016. With the R statistical software, the Fundamental Valuation Index (FVI) was calculated for each sample share and each year. From the FVI index, the undervalued shares were identified, indicating that the sales price does not reflect their economic fundamentals, and portfolio simulations were carried out for investment over three months or the next year. The results indicate the possible existence of overreaction and behavioral biases in the Brazilian stock market, which lead to the possibility of higher abnormal returns than those of the Ibovespa. Similar to the US market, at the end of the 2006-2016 period simulated portfolios yielded more than 274%, while the Ibovespa yielded approximately 80%. The robustness tests attest to the effectiveness of the model. The various investment portfolios, simulated over different time horizons, yielded more than the Ibovespa on average. The study also confirmed the assumptions of Gokhale, Tremblay, and Tremblay (2015) regarding the model's inadequacy for short-term strategies.