Overconfident Individual Day Traders: Evidence from the Taiwan Futures Market

37 Pages Posted: 14 Oct 2011 Last revised: 22 Apr 2013

See all articles by Weiyu Kuo

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: April 23, 2013

Abstract

A specific day-trading policy in Taiwan futures market allows an investigation of the performance of day traders. Since October 2007, investors who characterize themselves as “day traders” by closing their day-trade positions on the same day enjoy a 50% reduction in the initial margin. Because we can identify day traders ex ante , we have a laboratory to explore trading behavior without the contamination of potential behavioral biases. Our results show that the 3,470 individual day traders in the sample incur on average a significant loss of 61,500 (26,700) New Taiwan dollars after (before) transaction costs over October 2007-September 2008. This implies that day traders are not only overconfident about the accuracy of their information but also biased in their interpretations of information. We also find that excessive trading is hazardous only to the overconfident losers, but not to the winners. Last, we provide evidence that more experienced individual investors exhibit more aggressive day trading behavior, although they do not learn their types or gain superior trading skills that could mitigate their losses.

Keywords: overconfidence, index futures, day traders, individual investors, learning

JEL Classification: G10, G12, G13, C51

Suggested Citation

Kuo, Weiyu and Lin, Tse-Chun, Overconfident Individual Day Traders: Evidence from the Taiwan Futures Market (April 23, 2013). Journal of Banking and Finance, Forthcoming; Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1944059 or http://dx.doi.org/10.2139/ssrn.1944059

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business ( email )

Taipei City
Taiwan

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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