Gauging the effect of investor overconfidence on trading volume from the perspective of the relationship between lagged stock returns and current trading volume

Jiayu Huang, Yifan Wang, Yaojun Fan and Hexuan Li

International Finance, 2022, vol. 25, issue 1, 103-123

Abstract: Is investor overconfidence a major source of stock‐market trading volume? This study refers to the work of Grossman and Odean, introduces the assumption of investor overconfidence and empirically examines the influence of investor overconfidence on market trading volume in China's A‐share market through a vector autoregressive model estimation and Granger causality test. We find that overconfidence and self‐attribution exist in China's A‐share market. When the market is on an upswing, investors attribute large returns to the accuracy of their private information and the quality of their investment abilities; thus they trade more frequently, causing trading volume to increase more quickly. Conversely, when the market is on a downswing, investors attribute their investment losses to uncontrollable external factors; thus they become unwilling to trade, causing trading volume to shrink rapidly.

Date: 2022
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