Investor Overconfidence and Trading Volume

Posted: 29 Feb 2008

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Steven Thorley

BYU Marriott School of Business

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management

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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. (JEL G11, G12)

Suggested Citation

Statman, Meir and Thorley, Steven and Vorkink, Keith, Investor Overconfidence and Trading Volume. The Review of Financial Studies, Vol. 19, Issue 4, pp. 1531-1565, 2006. Available at SSRN: https://ssrn.com/abstract=1097947 or http://dx.doi.org/10.1093/rfs/hhj032

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

Steven Thorley

BYU Marriott School of Business ( email )

616 TNRB
Brigham Young University
Provo, UT 84602
United States
801-378-6065 (Phone)
801-378-5984 (Fax)

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

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