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Investor Overconfidence and Trading Volume

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Author Info
Meir Statman
Steven Thorley
Keith Vorkink
Abstract

The proposition that investors are overconfident about their valuation and trading skills can explain high observed trading volume. With biased self-attribution, the level of investor overconfidence and thus trading volume varies with past returns. We test the trading volume predictions of formal overconfidence models and find that share turnover is positively related to lagged returns for many months. The relationship holds for both market-wide and individual security turnover, which we interpret as evidence of investor overconfidence and the disposition effect, respectively. Security volume is more responsive to market return shocks than to security return shocks, and both relationships are more pronounced in small-cap stocks and in earlier periods where individual investors hold a greater proportion of shares. (JEL G11, G12) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhj032
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 19 (2006)
Issue (Month): 4 ()
Pages: 1531-1565
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Handle: RePEc:oup:rfinst:v:19:y:2006:i:4:p:1531-1565

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  1. Gloede, Oliver & Menkhoff, Lukas, 2009. "Financial professionals' overconfidence: Is it experience, job, or attitude?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-428, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  2. Nicholas C. Barberis & Wei Xiong, 2008. "Realization Utility," NBER Working Papers 14440, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jiang, Danling, 2008. "Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns," MPRA Paper 8325, University Library of Munich, Germany. [Downloadable!]
  4. Bruce Mizrach & Susan Weerts, 2006. "Highs and Lows: A Behavioral and Technical Analysis," Departmental Working Papers 200610, Rutgers University, Department of Economics. [Downloadable!]
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  5. George M. Korniotis & Alok Kumar, 2008. "Do behavioral biases adversely affect the macro-economy?," Finance and Economics Discussion Series 2008-49, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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