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Returns and Investor Behavior in Taiwan: Does Overconfidence Explain this Relationship?

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  • Mei-Chen Lin

    (National United University, 1, Lien Da, Kung-Ching Li, Miao-Li 36003, Taiwan, ROC)

Abstract

This paper examines whether overconfidence can explain the relationship between performance and behavior of investors in Taiwan. Different from prior research that used a specific sample of individuals trading records, this work focuses on aggregate investor behavior to know whether overconfidence is a market-wide phenomenon. It is found that overconfident investors will trade more aggressively, and the excessive trading of overconfident investors results in the observed excessive market volatility. However, overconfidence effect exists only following bull markets. After a period of stock gains, overconfident traders tend to title their investment toward smaller-cap and growth stocks, consistent with the prediction of overconfident hypothesis that as investors become overconfident, they underestimate risk and thereby trade in riskier stocks.

Suggested Citation

  • Mei-Chen Lin, 2005. "Returns and Investor Behavior in Taiwan: Does Overconfidence Explain this Relationship?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 405-446.
    • Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:03:n:s0219091505000476
    DOI: 10.1142/S0219091505000476
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    References listed on IDEAS

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    1. Markus Glaser & Thomas Langer & Martin Weber, 2007. "On the Trend Recognition and Forecasting Ability of Professional Traders," Decision Analysis, INFORMS, vol. 4(4), pages 176-193, December.
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    Cited by:

    1. Nosic, Alen & Weber, Martin, 2007. "Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs," Sonderforschungsbereich 504 Publications 07-56, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    2. Robert Goldberg, 2015. "A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios," Review of Quantitative Finance and Accounting, Springer, vol. 44(4), pages 733-754, May.

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    More about this item

    Keywords

    Overconfidence; market states; risk-taking; JEL Classifications: G12; JEL Classifications: C12; JEL Classifications: C32;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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