Investor Overconfidence, Margin Trade and Market Efficiency: Evidence Based on a Recent Financial Market Crash
49 Pages Posted: 7 Dec 2017
Date Written: December 2, 2017
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
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