Investor Overconfidence, Margin Trade and Market Efficiency: Evidence Based on a Recent Financial Market Crash

49 Pages Posted: 7 Dec 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

Southwestern University of Finance and Economics (SWUFE) - School of Accounting

Date Written: December 2, 2017

Abstract

We investigate the effect of investor overconfidence and margin trades on market efficiency around a market crash. We find that the price delay in a pre-crash period is about twice the price delay in a post-crash period. After a market crash, investors become more sensitive to market movements, resulting in small price delay and high price synchronicity. Margin traders not only trade on market trends but also put additional force on it, escalating the pyramiding and de-pyramiding effects caused by the shift in market sentiment. Finally, our results show that negative information travels slowly only when investors are overconfident.

Keywords: Investor overconfidence; Margin trade; Attribution bias; Market efficiency; Price delay; Chinese markets

JEL Classification: G14

Suggested Citation

Li, Mingsheng and Li, Qian and Li, Yan, Investor Overconfidence, Margin Trade and Market Efficiency: Evidence Based on a Recent Financial Market Crash (December 2, 2017). Available at SSRN: https://ssrn.com/abstract=3081547 or http://dx.doi.org/10.2139/ssrn.3081547

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

Southwestern University of Finance and Economics (SWUFE) - School of Accounting ( email )

55 Guanghuacun St
Sichuan, 610072
China

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