The Danger of Investor Overconfidence

46 Pages Posted: 16 Mar 2017

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Qian Li

East China Jiao Tong University

Yan Li

Baruch College, CUNY

Date Written: November 14, 2016

Abstract

We investigate how investor overconfidence and margin trades affect market efficiency around a market crash. We find that the price delay before a crash is about twice the price delay after a crash and that negative information travels slowly only when market sentiment is high because of investor overconfidence and attribution bias. After a market crash, constrained investors become more sensitive to market movements, resulting in high price synchronicity. In addition, margin traders not only trade on market trends but also generate additional momentum in prices, escalating the pyramiding and de-pyramiding effects caused by the shift in market sentiment.

Keywords: Investor Attention; Overconfidence; Margin Trade; Market Sentiment; Attribution Bias; Market Efficiency; Price Delay; Chinese Markets

JEL Classification: G02; G14

Suggested Citation

Li, Mingsheng and Li, Qian and Li, Yan, The Danger of Investor Overconfidence (November 14, 2016). Available at SSRN: https://ssrn.com/abstract=2932961 or http://dx.doi.org/10.2139/ssrn.2932961

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Qian Li

East China Jiao Tong University ( email )

Changbei Open and Developing District
Nanchang, Jiangxi 330013
China

Yan Li

Baruch College, CUNY ( email )

17 Lexington Avenue
New York, NY 10021
United States

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