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Investor overconfidence in the South African exchange traded fund market

Author

Listed:
  • Damien Kunjal
  • Faeezah Peerbhai
  • Mohammed M Elgammal

Abstract

Exchange Traded Funds (ETFs) have proven to be extremely popular amongst both retail and institutional investors. The increasing interest in this asset class may incite overconfidence in its’ investor base, which could lead to undesirable market effects such as security mispricing, excess trading volumes, and exacerbated market volatility. This study aims to examine the South African ETF market for presence of investor overconfidence. To achieve this objective, Vector Autoregression (VAR) models and their associated impulse response functions are employed to examine the relationship between the current trading activity and the historical market return. Consistent with the overconfidence hypothesis, a positive and significant relationship between current market turnover and lagged market returns is found for both ETFs with domestic benchmarks and ETFs with international benchmarks. Further analysis of panel VAR models and their associated impulse response functions suggest that the overconfidence bias also influences the trading activities of individual ETFs. These findings have important implications for various market participants.

Suggested Citation

  • Damien Kunjal & Faeezah Peerbhai & Mohammed M Elgammal, 2021. "Investor overconfidence in the South African exchange traded fund market," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1978190-197, January.
    • Handle: RePEc:taf:oaefxx:v:9:y:2021:i:1:p:1978190
    DOI: 10.1080/23322039.2021.1978190
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