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Gauging the effect of investor overconfidence on trading volume from the perspective of the relationship between lagged stock returns and current trading volume

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  • Jiayu Huang
  • Yifan Wang
  • Yaojun Fan
  • Hexuan Li

Abstract

Is investor overconfidence a major source of stock‐market trading volume? This study refers to the work of Grossman and Odean, introduces the assumption of investor overconfidence and empirically examines the influence of investor overconfidence on market trading volume in China's A‐share market through a vector autoregressive model estimation and Granger causality test. We find that overconfidence and self‐attribution exist in China's A‐share market. When the market is on an upswing, investors attribute large returns to the accuracy of their private information and the quality of their investment abilities; thus they trade more frequently, causing trading volume to increase more quickly. Conversely, when the market is on a downswing, investors attribute their investment losses to uncontrollable external factors; thus they become unwilling to trade, causing trading volume to shrink rapidly.

Suggested Citation

  • Jiayu Huang & Yifan Wang & Yaojun Fan & Hexuan Li, 2022. "Gauging the effect of investor overconfidence on trading volume from the perspective of the relationship between lagged stock returns and current trading volume," International Finance, Wiley Blackwell, vol. 25(1), pages 103-123, April.
    • Handle: RePEc:bla:intfin:v:25:y:2022:i:1:p:103-123
    DOI: 10.1111/infi.12405
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    References listed on IDEAS

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    Cited by:

    1. Jitender Kumar & Neha Prince, 2022. "Overconfidence bias in the Indian stock market in diverse market situations: an empirical study," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(6), pages 3031-3047, December.
    2. Esra Alp Coşkun & Hakan Kahyaoglu & Chi Keung Marco Lau, 2023. "Which return regime induces overconfidence behavior? Artificial intelligence and a nonlinear approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-34, December.

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