The Cost of Overconfidence in Public Information

51 Pages Posted: 27 May 2016 Last revised: 28 Sep 2021

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Youngha Cho

Oxford Brookes University

Sanha Noh

Jeonbuk National University

Date Written: September 26, 2021


We investigate the effects of investor overconfidence in public information on cross-sectional asset returns. The results show that investors in the US equity market are overconfident about public signals for mature firms that are relatively easy to priceā€”old, large, and dividend-paying firms, value firms, and firms with a higher proportion of tangible assets, little external financing, and low sales growth. However, the effects of the overconfidence on cross-sectional stock returns are reversed quickly and comprise more than half of the short-term return reversals. The risk-adjusted cost of being overconfident about the noisy public signals, measured by return reversals of hedge portfolios formed on unexpected responses, is over 1.1% per month in the first month after portfolio formation, and is still significant despite the active arbitrage trading in the 2000s.

Keywords: Overconfidence, Factors, Public Signals, Short-term Return Reversals, Overconfidence

JEL Classification: G12, G41

Suggested Citation

Hwang, Soosung and Cho, Youngha and Noh, Sanha, The Cost of Overconfidence in Public Information (September 26, 2021). Available at SSRN: or

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2, Sungkyunkwan-ro
Seoul, 03063
Korea, Republic of (South Korea)
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

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Youngha Cho

Oxford Brookes University ( email )

Gipsy Lane
Oxford, Oxon OX3 0BP
United Kingdom
44-1865-483941 (Phone)
44-1865-483927 (Fax)

Sanha Noh (Contact Author)

Jeonbuk National University ( email )

567 Baekje-daero, Geumam 1(il)-dong
Korea, Republic of (South Korea)

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