Abstract
Anchoring effect is basically the use of anchors or baseline values which leads to market under and over reaction. In order to investigate the existence of anchoring bias in Pakistani stock market, this study uses nearness to 52 weeks high and nearness to historical high as proxies for under reaction and over reaction respectively. The results show that the nearness to 52 weeks high positively predicts the future returns while on the other hand, nearness to historical high negatively predicts future returns on KSE-100 and KSE-30. The study uses KSE-100 for main time series analysis while KSE-30 for robust checking. It was found that there is no significant difference between the KSE-100 and KSE-30 results respectively. The results show that nearness to 52 weeks high and nearness to historical high being two major anchors, along with other macro-economic variables have a prediction power of approximately 62 percent. Similarly, GARCH (1, 1) model has been used to assess the relationship between future and past returns based on volatility clusters. The results indicate the existence of first order autoregressive feature in GARCH (1, 1) model respectively. The results further explain that the predictive power of the individual variables of the study declines while moving from daily to annual horizons respectively.
