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Overconfident individual day traders: Evidence from the Taiwan futures market

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  • Kuo, Wei-Yu
  • Lin, Tse-Chun

Abstract

A specific day-trading policy in Taiwan futures market allows an investigation of the performance of day traders. Since October 2007, investors who characterize themselves as “day traders” by closing their day-trade positions on the same day enjoy a 50% reduction in the initial margin. Because we can identify day traders ex ante, we have a laboratory to explore trading behavior without the contamination of potential behavioral biases. Our results show that the 3470 individual day traders in the sample incur on average a significant loss of 61,500 (26,700) New Taiwan dollars after (before) transaction costs over October 2007–September 2008. This implies that day traders are not only overconfident about the accuracy of their information but also biased in their interpretations of information. We also find that excessive trading is hazardous only to the overconfident losers, but not to the winners. Last, we provide evidence that more experienced individual investors exhibit more aggressive day trading behavior, although they do not learn their types or gain superior trading skills that could mitigate their losses.

Suggested Citation

  • Kuo, Wei-Yu & Lin, Tse-Chun, 2013. "Overconfident individual day traders: Evidence from the Taiwan futures market," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3548-3561.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3548-3561
    DOI: 10.1016/j.jbankfin.2013.04.036
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    References listed on IDEAS

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    Cited by:

    1. Chiang, Mi-Hsiu & Chiu, Hsin-Yu & Kuo, Wei-Yu, 2021. "Predictive ability of similarity-based futures trading strategies," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    2. Helen X. H. Bao & Steven Haotong Li, 2020. "Investor Overconfidence and Trading Activity in the Asia Pacific REIT Markets," JRFM, MDPI, vol. 13(10), pages 1-21, September.
    3. Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Does proprietary day trading provide liquidity at a cost to investors?," International Review of Financial Analysis, Elsevier, vol. 68(C).
    4. Elina Pradkhan, 2016. "Information Content of Trading Activity in Precious Metals Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 421-456, May.
    5. Yi‐Wei Chuang & Yu‐Fen Lin & Pei‐Shih Weng, 2019. "Why and how do foreign institutional investors outperform domestic investors in futures trading: Evidence from Taiwan," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 279-301, March.
    6. Chuang, Yi-Wei & Tsai, Wei-Che & Weng, Pei-Shih, 2020. "The impact of weather on order submissions and trading performance," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    7. TOMA, Filip-Mihai & CEPOI, Cosmin-Octavian & NEGREA, Bogdan, 2021. "Does it payoff to be overconfident? Evidence from an emerging market – a quantile regression approach," Finance Research Letters, Elsevier, vol. 38(C).
    8. Fernando Chague & Rodrigo De-Losso, Bruno Giovannetti, 2019. "Day trading for a living? Fernando," Working Papers, Department of Economics 2019_47, University of São Paulo (FEA-USP).
    9. Osman Sayid Hassan Musse & Abdelghani Echchabi & Hassanuddeen Abdul Aziz, 2015. "Islamic and Conventional Behavioral Finance: A Critical Review of Literature التمويل السلوكي الإسلامي والتقليدي: مراجعة نقدية للأدبيات," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(2), pages 237-251, July.
    10. Utpal Bhattacharya & Wei-Yu Kuo & Tse-Chun Lin & Jing Zhao, 2018. "Do Superstitious Traders Lose Money?," Management Science, INFORMS, vol. 64(8), pages 3772-3791, August.
    11. Kuo, Wei-Yu & Lin, Tse-Chun & Zhao, Jing, 2024. "The correlated trading and investment performance of individual investors," Journal of Empirical Finance, Elsevier, vol. 78(C).
    12. Fung, Scott & Tsai, Shih-Chuan, 2021. "The price discovery role of day traders in futures market: Evidence from different types of day traders," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 53-77.
    13. Chague, Fernando & De-Losso, Rodrigo & Giovannetti, Bruno Cara, 2020. "Day trading for a living?," Textos para discussão 525, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    14. Hao, Ying & Chou, Robin K. & Ho, Keng-Yu & Weng, Pei-Shih, 2015. "The impact of foreign institutional traders on price efficiency: Evidence from the Taiwan futures market," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 24-42.
    15. Matthew C. Chang & Chih‐Ling Tsai & Rebecca Chung‐Fern Wu & Ning Zhu, 2018. "Market uncertainty and market orders in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 865-880, August.

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    More about this item

    Keywords

    Overconfidence; Index futures; Day traders; Individual investors; Learning;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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