Irrationality of stock markets in India: Behavioral evidence from Nifty and Sensex indices

Abstract

Traditional financial theory assumes that investors behave rationally and markets efficiently incorporate all available information. However, behavioral finance challenges this assumption by suggesting that psychological biases and investor sentiment significantly influence financial markets. This study examines irrational behavior in the Indian stock market using empirical data from the Nifty 50 and BSE Sensex. Using correlation analysis, regression modeling, and descriptive statistics, the study investigates whether investor sentiment and herd behavior contribute to deviations from rational market behavior. Results reveal strong evidence of behavioral biases affecting market returns, suggesting that the Indian stock market deviates from the assumptions of the Efficient Market Hypothesis.