Behavioural Finance: Testing the Efficient Market Hypothesis on the Belgrade Stock Exchange

The goal of this paper is to highlight the limitations and reasons for the failure in modeling and materialization of scientific findings due to the assumption of rational behavior by investors. The confirmed inef- ficiency in the capital market affects investors in such a way that their decisions are not based on a proper evaluation of financial instruments. The results of the conducted empirical research disprove the hypothesis of traditional finance, which assumes rational decision-making. There- fore, to comprehend the process of investment decision-making, it is necessary to adopt the approach offered by behavioral finance, which incorporates a component of irrationality. The purpose is to analyze Belex15 yields and volatility with the aim of making effective invest- ment decisions by applying and comparing the results of ARCH and GARCH models. These models are designed for time-series analysis, considering the observed instability of conditional variance. Using 2,517 daily logarithmic returns of Belex15, the E-GARCH model was selected, and the results suggest that investors must be cautious in their decision-making as the impact of negative shocks on yield volatility has a strong long-memory effect, making these investments highly risky, especially during unfavorable economic conditions.