Investor Overconfidence: An Emerging Market Analysis

Date

2024-01-04

Author

Çaylak, Ceyda
Danışoğlu, Seza

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Normal 0 false false false TR X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:8.0pt; mso-para-margin-left:0in; line-height:107%; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman",serif; mso-ansi-language:TR;} Finance theory assumes that investors behave rationally, optimize their returns, and are risk averse. However, anomalies, such as excess trading volume or excess volatility, are observed in the market and these anomalies need to be explained in light of the rationality assumption. Behavioral finance theories suggest that overconfidence is a notable bias that may explain some of these anomalies. Overconfident investors are more inclined to attribute their success to their abilities and knowledge rather than luck or the announcements in the market. In this study, stock preferences of individual and institutional investors and the outcome of their investment choices are examined during bull and bear periods in an emerging market setting. Findings of the study suggest that individual ownership is higher for stocks with higher volatility and book-to-market values during bull periods, implying that these investors are more likely to hold the stocks that they think are undervalued but might be more valuable in the future. Contrarily, institutional investors prefer stocks with low volatility and book-to-market during both bull and bear periods. Results also show that both investor types prefer stocks with higher volatility during both bull and bear periods. Findings also suggest that individual investors are more prone to buying past loser stocks and selling past winner stocks (negative feedback trading), especially during bear periods. This result is not aligned with the overconfidence hypothesis in general, but it gives valuable insights about the investment strategies of investors in an emerging market.

URI

https://hdl.handle.net/11511/117680

Collections

Department of Business Administration, Conference / Seminar