Investor Overconfidence and the Increase in Idiosyncratic Risk

41 Pages Posted: 28 Feb 2008 Last revised: 1 Nov 2012

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Yan Luo

Fudan University

Jinjuan Ren

University of Macau

Date Written: February 28, 2008

Abstract

This paper examines the relation between investor overconfidence and the idiosyncratic volatility of stock returns. We use investor sentiment, stock turnover, stock misvaluation, and institutional ownership to measure the influence of investor overconfidence on stocks, and find that idiosyncratic volatility is correlated with investor overconfidence proxies in both cross-sectional and time-series tests. The results are robust when other well-documented determinants of idiosyncratic volatility such as firm size, age, stock price, profitability, and growth options are controlled. We thus conclude that investor overconfidence contributes to the dynamics of idiosyncratic volatility both across stocks and over time.

Keywords: Overconfidence, Idiosyncratic Risk

JEL Classification: D82, D83, G12, G14

Suggested Citation

Chang, Eric Chieh C. and Luo, Yan and Ren, Jinjuan, Investor Overconfidence and the Increase in Idiosyncratic Risk (February 28, 2008). Available at SSRN: https://ssrn.com/abstract=1099269 or http://dx.doi.org/10.2139/ssrn.1099269

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Yan Luo

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Jinjuan Ren

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

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