The overconfident trading behavior of individual versus institutional investors
Journal
International Review of Economics and Finance
Journal Volume
45
Pages
518
Date Issued
2016-09-01
Author(s)
Abstract
© 2016 Elsevier Inc. A double-threshold GARCH model is employed to simultaneously investigate the relative degree of overconfident trading of individual versus institutional investors and the impact of their overconfident trading on stock return volatility across high and low market return regimes. The results show that both individual and institutional investors trade more overconfidently in high market return regimes than in low, which corresponds to the finding that the return volatility is also higher in high market return regimes compared to low regimes. Conditional on the market state, market volatility, and market liquidity, it is believed that both individual and institutional investors exhibit more pronounced overconfident trading behavior when the market is up, less volatile, and more liquid across market return regimes. Finally, we obtain consistent evidence that individual investors trade with more overconfidence than institutional investors in these market conditions during high market return regimes, indicating that individual investors are more overconfident traders than institutional investors.
Subjects
Double-threshold GARCH model | Market liquidity | Market regime | Market volatility | Overconfident trading
Publisher
ELSEVIER SCIENCE BV
Type
journal article