Spot Market vs. Biases: Unveiling the Independence of Investor Behavior in Derivative Trading

Abstract: It is well established by earlier researches that the derivative market instruments are heavily influenced by the performance of their underlying in the spot market. Based on this background, the study aims to analyze whether the behavior of investors in the derivative market is influenced by the spot market price movement. For this, the moderating role of spot market is analyzed on the relationship of behavioral biases and decision making of derivative market investor. Market Volatility of Nifty50 index was used as the spot market indicator, while five behavioral biases are used for analyzing the predictor variables - namely, Herding, Regret Aversion, Overconfidence, Anchoring and Adjustment and Mental Accounting. A structured questionnaire was distributed via Google Forms, collecting data from 237 derivative market investors using snowball as well as purposive sampling. Moderator analysis was conducted using RStudio, and Confirmatory Factor Analysis (CFA) was performed to validate the factors. Market volatility was calculated through the eGARCH method. The results reveal that there is no significant moderator influence of spot market on the relationship of behavioral biases on decision making of derivative market investors. The investors’ behavior in the market is influenced by biases independent of the influence of the spot market conditions. This research provides novel insights into the interplay between spot and derivative markets, highlighting that behavioral biases act independently of spot market influences. Keywords: Behavioral Finance, Derivative Market, Spot Market, Moderator Analysis, Volatility, Biases JEL Classification Number: G02, G41, G12, G83, G58