Keywords

investor overconfidence, trading volume, disposition effect

Abstract

The proposition that investors are overconfident about their valuation and trading skills can explain high observed trading volume. With biased self-attribution, the level of investor overconfidence and thus trading volume varies with past returns. We test the trading volume predictions of formal overconfidence models and find that share turnover is positively related to lagged returns for many months. The relationship holds for both market-wide and individual security turnover, which we interpret as evidence of investor overconfidence and the disposition effect, respectively. Security volume is more responsive to market return shocks than to security return shocks, and both relationships are more pronounced in small-cap stocks and in earlier periods where individual investors hold a greater proportion of shares.

Original Publication Citation

“Investor Overconfidence and Trading Volume,” (with Meir Statman and Steven Thorley), 2006, Review of Financial Studies, 19, 1531-1565.

Document Type

Peer-Reviewed Article

Publication Date

2003

Publisher

Review of Financial Studies

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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