JAC : A Journal Of Composition Theory ISSN : 0731-6755

Behavioral Myth of Retail Investors in Commodity Derivative

Market – With reference to Coimbatore District
Dr.M.Anbukarasi
Assistant Professor, School of Commerce
Bharathiar University, Coimbatore, Tamil Nadu, India
Email- anbujan2011@gmail.com

M.Devaki
Ph.D Research Scholar, School of Commerce
Bharathiar University, Coimbatore, Tamil Nadu, India
Email- deva.shylu@gmail.com

Abstract- The entrenched piece of information that the effectiveness and appropriateness of futures trading in
developing the underlying derivative market, especially in commodity futures derivatives market in India is
one of the budding market from investors’ point of view. In this work, the researcher has analyzed the
behavior myths of retail investors in Commodity derivative market in Coimbatore City. This research paper
is centered on the dual objectives of exploring the behavioral myths of commodity derivative market investors
and suggesting suitable strategies to overcome them. The respondents were chosen through non-probability
sampling technique using structured questionnaire. Exploratory factor analysis was used to reduce the
dimensions and explore the latent variables of the study. The study confirms the presence of five major
behavioral myths among the commodity derivative market investors. The researcher recommends suitable
strategies to overcome these behavioral biases.
Keywords: Herding Behavior, Behavioral Finance, Commodity Derivative Market, Retail Investors

I. INTRODUCTION
Behavioural finance is the study of the authority of psychology on the behaviour of financial practitioners and the
consequent effect on markets. As the financial economist were assuming that investors behaved realistically when
making financial decisions, psychologists have found that financially viable verdict are made in an specious manner,
so they dispute this postulation of standard finance. The finance field was reluctant to accept the view of
psychologists who had proposed the behavioural finance model. Behaviour finance was considered first by the
psychologist Daniel Kahneman and economist Vernon Smith, who was awarded the Nobel Prize in Economics in
2002. This was the occasion when pecuniary economist started to deem that the depositor behaves irrationally. Over
the past decade, field of behavioural finance has progress to consider how personal and social psychology
manipulate financial decisions and behavior of investors in general.
The obtainable practicalities of monetary hypothesis of market efficiency and asset pricing are based on the
assertion of coherent and efficacy maximizing investors. However, researchers athwart the sphere have been
fanatical to examine a new dimension to investor behavior and psychology. The traditional finance theories
disregard that market participants make errors and are guided by behavioral patterns in making investment choices

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JAC : A Journal Of Composition Theory ISSN : 0731-6755

and decisions. This leads to market anomalies and fluctuations. The modern financial theory has placed people and
their psychology in the center of the debates. Such irrational human behavior has been the reason of global financial
market overvaluations and eventual crises across time and its relevance has lead to the emergence of behavioral
finance.
II. REVIEW OF LITERATURE
(P. Periasamy, 2018) investigates the perception of investors towards Indian commodity derivative market with
inferential analysis in Chennai city. The researcher has found out the expectations of investors and awareness among
them about Indian Commodity Derivatives Market and their investment options in Commodity Exchange. This
Research study is descriptive research design, wherein data are collected both from Primary Sources as well as
Secondary Sources. The Primary data are collected from the specific sample groups with the help of well-
constructed questionnaires through direct contact and also telephonic interviews and stratified random sampling
technique has been applied to find out the exact sample size. Population for the study is Commodity Derivatives
Market investors in Chennai City during the study period 2011 - 2015. The study concludes with necessary steps
with the implementation towards the suggestions recommended to investors.
(Senthil, 2015) attempts to study the investor’s awareness and perception about commodity futures market. The
study has aimed to evaluate investor’s trading frequency habits, goals of investors, literacy and awareness level and
emotional risk tolerance. The data used in this study was obtained from 100 investors who had more than one year
experience in commodity market. The researcher suggest to investor’s that they need to choose the right product to
enter into the market on the basis of time ability skill. It helps to reduce the risk of their portfolio.
(Manrai, 2015) analyzed the investor behavior towards derivative markets in Indian context.
The researcher will identify and evaluate the dynamics influencing investors‟ perception towards investment
decision on derivatives market. The study would like to inspect the Investors objective and preferred type of
instrument for investment. The study made to identify Investors opinion on derivatives market and another objective
of the study is to study the Factors influence trade in derivative instrument. This study gives adequate attention to
the investor towards derivative market and draw inferences from investor’s behavior so that the derivative market
can benefit and understand investor’s preference better and unravel the factors that influence the risk tolerance level
of the investors.
III. STATEMENT OF THE PROBLEM
In Indian commodity derivative market there are number of economic instrument and segments are
available for the investors. Some are perilous and others are risk gratis commodities. The investor broadly classified
into three objectives i.e. maximization of revisit, minimization of possibility or hedge against price increases. The
investor has to choose the right opportunity among these, depending upon their risk taking enthusiasm. The study
aims at understanding investor’s behavior when it comes to make investment in commodity futures derivative
market. The focus of the study is on the behavioral myths of retail investors in commodity derivative market in
Coimbatore district.

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IV. OBJECTIVES OF THE STUDY

1. To analyze the behavioural myths of retail investors in commodity derivative market with special reference
to Coimbatore City
2. To recommend strategies to overcome the behaviour myths of retail investors in Coimbatore City.
V. RESEARCH METHODOLOGY
The study is Descriptive in nature. It consists of Primary data. The purposive sampling technique was
adopted for the study because of the unknown population. The data has been collected from through the structured
questionnaire from 150 respondents, Coimbatore district. The study was conducted for the period of three months
from September 2019 to November 2019. The reliability analysis was applied to test the feasibility of the construct
and internal consistency of the data with the reliability measure of Cronbach’s alpha co-efficient. Exploratory Factor
analysis was used to analyze the behavior fallacies of retail investors. In this study the Cronbach’s alpha value is
0.782, which is greater than 0.60 it ensures that internal consistency of the research instrument and data are highly
reliable.
VI. RESULTS AND DISCUSSION
Table 1: KMO and Bartlett’s Test

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .702
Approx. Chi-Square 3397.294
Bartlett's Test of Sphericity df 351
Sig. .000
Source: Primary & Computed data
The table 1 describes Factor analysis which has been applied to identify the behavior myths of retail
investors in commodity derivatives market of Coimbatore District. The value of Kaiser-Meyer-Olkin (KMO)
measures of sampling adequacy was 0.702 which is more than 0.5. It shows that the factors are statistically
significant and the data reduction technique is employed to reduce the components and it highly satisfies to declare
the myths of investors on commodity market. The Bartlett’s Test of Sphericity significant value is 0.000 which is
less than 5% level of significance.

Table 2: Communalities

Communalities
Initial Extraction
I buy popular commodity stocks which are in news or ‘hot’ stocks and avoid stocks
1.000 .594
that have performed poorly in the recent past.
I use past performance of some representation commodity stocks to make
1.000 .586
investment decision
I believe that my skills and knowledge of commodity derivative market can help
1.000 .393
me to outperform the commodity market.

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JAC : A Journal Of Composition Theory ISSN : 0731-6755

I rely on my previous experiences in the commodity market for my next

1.000 .416
investment.
I forecast the changes in futures commodity market in the future based on the
1.000 .486
recent commodity prices.
I am normally able to predict the poor market returns. 1.000 .453
I prefer to buy local commodities than international commodities because the
1.000 .654
information of local commodities is more available.
I take information from my close friends and relatives for my investment decisions. 1.000 .328
After a prior gain, I am more risk seeking than usual. 1.000 .537
After a prior loss, I become more risk averse. 1.000 .456
I avoid selling commodity shares that have decreased in value and readily sell
1.000 .653
shares that have increased in value.
I feel more sorrow about holding losing stocks long than about selling winning
1.000 .703
stocks soon.
I treat each element of my investment portfolio separately. 1.000 .718
I ignore the connection between different investment possibilities. 1.000 .313
I use tools to avoid losses and protect the investment. 1.000 .605
I consider carefully the price changes of commodity stocks that I want to invest in. 1.000 .741
I over-react to price changes of commodity stocks. 1.000 .542
I consider market information important for my stock investment. 1.000 .346
I put my past performance of stocks under my consideration for my investment. 1.000 .446
I analyze the commodity market performance before I invest in the stocks. 1.000 .581
I study about the market concepts of lying stocks before making investment
1.000 .827
decisions.
Other investor’s decisions of choosing stock types have impact on my investment
1.000 .636
decisions.
Other investor’s decisions of the stock volume have impact on my investment
1.000 .555
decisions
I react quickly to the changes of other investor’s decisions and follow their
1.000 .811
reactions to the commodity futures market.
The rate of return of my neighbor stock investment meets my expectation. 1.000 .503
My rate of return is equal to or higher than the average return rate of the market. 1.000 .718
I feel satisfied with my investment decisions in the last year (including selling,
1.000 .330
buying, choosing commodity and deciding the stock volumes).
Extraction Method: Principal Component Analysis.

The table 2 illustrates the communalities for the factor analysis of behavior myths of retail investors on
commodity market in Coimbatore District. Extraction method used for communalities is Principal Component
Analysis, the extraction values are greater than 0.3 its shows the extracted factors are reliable for the study.

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JAC : A Journal Of Composition Theory ISSN : 0731-6755

Table 3: Rotated component Matrixa

Factor Name Statements Factor Loading
I take information from my close friends and relatives for my investment
.797
decisions.
I study about the market concepts of lying stocks before making investment
Herding .765
decisions.
Behaviour
Other investor’s decisions of choosing stock types have impact on my investment
.714
decisions.
Other investor’s decisions of the stock volume have impact on my investment
Total Variance is .606
decisions.
11.735%
I react quickly to the changes of other investor’s decisions and follow their
.664
reactions to the commodity futures market.
The rate of return of my neighbor stock investment meets my expectation. .598
I buy popular commodity stocks which are in news or ‘hot’ stocks and avoid
.651
stocks that have performed poorly in the recent past.
Over Confidence I use past performance of some representation commodity stocks to make
.588
investment decision.
Total Variance is I am normally able to predict the poor market returns. .558
11.508% I use tools to avoid losses and protect the investment. .538
I feel satisfied with my investment decisions in the last year (including selling,
.495
buying, choosing commodity and deciding the stock volumes).
I rely on my previous experiences in the commodity market for my next
.548
investment.
I forecast the changes in futures commodity market in the future based on the
Self Attribution .534
recent commodity prices.
I avoid selling commodity shares that have decreased in value and readily sell
Total Variance is .507
shares that have increased in value.
10.573%
I feel more sorrow about holding losing stocks long than about selling winning
.504
stocks soon.
I put my past performance of stocks under my consideration for my investment. .472
I believe that my skills and knowledge of commodity derivative market can help
.689
me to outperform the commodity market.
Observation I prefer to buy local commodities than international commodities because the
.649
information of local commodities is more available.
Total Variance is I treat each element of my investment portfolio separately. .598
10.114% I ignore the connection between different investment possibilities. .571
I consider carefully the price changes of commodity stocks that I want to invest in. .542
I analyze the commodity market performance before I invest in the stocks. .505
After a prior gain, I am more risk seeking than usual. .585
Narrative Myth
After a prior loss, I become more risk averse. .578
I over-react to price changes of commodity stocks. .571
Total Variance is
I consider market information important for my stock investment. .436
9.521%
My rate of return is equal to or higher than the average return rate of the market. .398
Cumulative Rotated Sum of Factor Loadings
53.451
Source: Primary & Computed data

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The table 3 demonstrates the factors which were extracted using principal component analysis and Varimax
rotation with Kaiser Normalization. The factor analysis of the data was computed and five factors are derived for 27
statements. The factors are named as Herding Behavior, Over Confidence, Self Attribution, Observation and
Narrative myths. The factors were extracted at the variance of 53.451 %, which shows the cumulative percent of the
sum of the squared loadings. The five factors are derived with Eigen values exceeding one and the values are 3.686,
3.126, 2.803, 2.641 and 2.176 respectively. The total variance explained in the table as percentage of total variance
for the Herding Behaviour its total variance is 11.735%, Over Confidence its total variance is 11.508%, Self
Attribution its total variance is 10.573%, Observation its total variance is 10.114% and Narrative Fallacy its total
variance is 9.521%. Hence the result shows clearly by the total variance the herding behaviour is highly influencing
the retail investors.
VII. SUGGESTION
From Investor’s point of view, the common impression is that derivatives are very difficult to understand and is not
possible to invest and they thought that investors need a greater level of experience in trading. Therefore, it is
suggested that the new investors to derivative market should try to gain experience in Futures trading for which they
can invest minimum portion of their investment during their early stages of trading in Futures segment.
VIII. CONCLUSION
This paper examines the behavioral myths of retail investors in commodity derivative market of Coimbatore district.
Among the behavioral myths, herding behavior is more influencing the retail investors in commodity derivative
market. Although, herding is noticed in index futures market, this study has addressed commodity issues, like
herding in futures market segments and usage of speculative models. Hence, the study is concluded that the
investors are rationally following the previous investors return pattern and knowledge of instruments in commodity
futures market.

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[10] M.Thirunarayanasamy, & Mr.P.Jeyakumar. "Investors Attitude and Perception towards Commodity Market - A Study with Special
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