The overconfident trading behavior of individual versus institutional investors

Hsiang-Hsi Liu, Wen-I Chuang, Jih-Jeng Huang and Yu-Hao Chen

International Review of Economics & Finance, 2016, vol. 45, issue C, 518-539

Abstract: A double-threshold GARCH model is employed to simultaneously investigate the relative degree of overconfident trading of individual versus institutional investors and the impact of their overconfident trading on stock return volatility across high and low market return regimes. The results show that both individual and institutional investors trade more overconfidently in high market return regimes than in low, which corresponds to the finding that the return volatility is also higher in high market return regimes compared to low regimes. Conditional on the market state, market volatility, and market liquidity, it is believed that both individual and institutional investors exhibit more pronounced overconfident trading behavior when the market is up, less volatile, and more liquid across market return regimes. Finally, we obtain consistent evidence that individual investors trade with more overconfidence than institutional investors in these market conditions during high market return regimes, indicating that individual investors are more overconfident traders than institutional investors.

Keywords: Overconfident trading; Double-threshold GARCH model; Market regime; Market volatility; Market liquidity (search for similar items in EconPapers)
JEL-codes: C32 G10 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:45:y:2016:i:c:p:518-539

DOI: 10.1016/j.iref.2016.07.016

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