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Private information advantage or overconfidence? Performance of intraday arbitrage speculators in the Chinese stock market

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  • Zhang, Xiaotao
  • Liang, Junpeng
  • He, Feng

Abstract

Using a unique investor account database from a large brokerage company in China, we study the relationship between overconfidence and individual stock investment performance. We show that overconfident investors hurt their performance by trading more in general. We then focus on the effects of the different overconfidence levels of intraday and non-intraday arbitrage investors to study how overconfidence affects individual investor behaviour. Intraday arbitrage investors tend to be more overconfident and have lower returns. We discover the different U-shaped patterns between the two groups; while overconfident investors trade more in non-intraday arbitrage groups that hurt their returns, the excess trading times of intraday arbitrage investors also show that they are better at gaining profits with higher trading frequency. We further conclude that the realised returns of intraday arbitrage induce higher levels of investor overconfidence, which hurts the overall returns of investors. We provide the first direct empirical evidence of the effect of overconfidence on individual investment returns in the Chinese stock market.

Suggested Citation

  • Zhang, Xiaotao & Liang, Junpeng & He, Feng, 2019. "Private information advantage or overconfidence? Performance of intraday arbitrage speculators in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:pacfin:v:58:y:2019:i:c:s0927538x19300411
    DOI: 10.1016/j.pacfin.2019.101215
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    9. 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.
    10. 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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