BEHAVIOURAL FINANCE AND ITS IMPLICATIONS FOR ASSET PRICING MODELS

Abstract

This study explores the implications of behavioural finance on asset pricing models, specifically within the context of the Nepal Stock Exchange (NEPSE). Traditional asset pricing models, such as the Capital Asset Pricing Model (CAPM), often assume rational investor behavior and market efficiency. However, these models frequently overlook the psychological biases and emotions that influence investor decisions. By integrating behavioral finance factors—such as momentum, volatility, and trading volume—into an extended CAPM, this research aims to provide a more accurate representation of market dynamics in Nepal. The findings reveal that behavioral factors significantly impact stock returns, highlighting the limitations of traditional models and underscoring the necessity of incorporating behavioral insights into asset pricing frameworks. This study offers valuable implications for investors, financial advisors, and policymakers, advocating for a more comprehensive approach to understanding and predicting market behavior in emerging economies.