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Overconfidence as a determinant of volatility in Latin American stockmarkets

Author

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  • Arturo Lorenzo Valdés

    (Universidad de las Américas Puebla San Andrés Cholula, Puebla, México)

Abstract

We propose an EGARCH model with a standardized Student’s t distribution for the innovations. The model is used to describe the behavior of the volatility of 6 Latin American stock indices returns. In the conditional variance equation we incorporated factors that represent investor’s overconfidence to determine whether this cognitive bias affects the volatility of returns. The results suggest that: 1) The return series analyzed can be adequately described by the proposed model, 2) the property of leverage effect is observed in the return series, of Chile, Colombia, Mexico and Peru; 3) in general we can say that overconfidence is a determinant of volatility, and 4) in times of crisis the confidence is lost in financial markets, mainly the Mexican.

Suggested Citation

  • Arturo Lorenzo Valdés, 2016. "Overconfidence as a determinant of volatility in Latin American stockmarkets," Contaduría y Administración, Accounting and Management, vol. 61(2), pages 324-333, Abril-Jun.
    • Handle: RePEc:nax:conyad:v:61:y:2016:i:2:p:324-333
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