Investor Overconfidence: An Emerging Market Analysis

Çaylak, Ceyda
In finance theory, the investors are assumed to behave rationally, optimize their returns and risk-averse. Yet, there are anomalies in the market such as excess trading volume or excess volatility that need to explained whereas investors are assumed to be rational. The theories in the behavioral finance suggest that overconfidence is a notable bias that can be used to explain the anomalies in the market. The overconfident investors are more inclined to attribute their success to their abilities and knowledge rather than luck or the announcements in the market. This thesis examines the investors, whether individual or institutional, preferences of the stock characteristics and the outcome of their investments under bull and bear periods by using panel and regression analysis and interpret these findings according to the literature on the overconfidence hypothesis. The findings suggest that there is a relationship between the individual ownership level and the stocks with higher volatility and book-to-market values during the bull period. Besides, this relationship is even stronger during the bear period. Moreover, the individual investors are more likely to buy past loser and sell winner stocks. The results show that the institutional investors prefer stocks with low volatility and book-to-market during both of the bull and bear periods.
Citation Formats
C. Çaylak, “Investor Overconfidence: An Emerging Market Analysis,” M.S. - Master of Science, Middle East Technical University, 2023.