Overconfidence and portfolio return expectations: The mediating role of option trading behavior

Yu Zhang () and Swarn Chatterjee ()
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Yu Zhang: Kansas State University
Swarn Chatterjee: University of Georgia

Economics Bulletin, 2025, vol. 45, issue 3, 1283 - 1296

Abstract: This paper investigates the role of overconfidence in investment knowledge on higher investment portfolio return expectations, with a focus on the mediating role of option trading behavior among individual American investors. The findings show that overconfidence, assessed using two methods derived from investment knowledge, namely, the z-score difference between subjective and objective investment knowledge and the residuals from regressing subjective investment knowledge on objective investment knowledge, was consistently associated with an increased likelihood of engaging in option trading behavior and holding the belief that one's investment portfolio returns were superior to the market average. The mediation analysis further reveals that overconfidence mediated by actively participating in options trading, may result in investors' positive perception of their portfolio performance. This study provides valuable insights for financial practitioners and researchers about the association between individual investor characteristics and option trading behavior, as well as potential explanations for why some investors believe they will outperform the market.

Keywords: Investment knowledge; Option trading; Overconfidence; Mediation (search for similar items in EconPapers)
JEL-codes: D8 G1 (search for similar items in EconPapers)
Date: 2025-09-30
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