OVERCONFIDENCE BIAS: EXPLANATION OF MARKET ANOMALIES FRENCH MARKET CASE
OVERCONFIDENCE BIAS: EXPLANATION OF MARKET ANOMALIES FRENCH MARKET CASE

Summary/Abstract: In this study, we test whether the overconfidence bias explains several stylized market anomalous, including a short-term continuation (momentum), a long-term reversal in stock returns, high levels of trading volume and excessive volatility. Using data of French stocks market, we find empirical evidence in support of overconfidence hypothesis. First, based on a restricted VAR framework, we show that overconfident investors overreact to private information and underreact to public information. Second, by performing Granger-causality tests of stock returns and trading volume, we find that overconfident investors trade more aggressively in periods subsequent to market gains. Third, based on a two GARCH specifications, we show that self attribution bias, conditioned by right forecasts, increases investors overconfidence and trading volume. Fourth, the analysis of the relation between return volatility and trading volume shows that the excessive trading of overconfident investors makes a contribution to the observed excessive volatility.

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