Disposition Effect and Overconfidence in Pakistani Stock Market

Abstract

In worldwide financial markets, increased trading is a more common observable factor that not goes in favor of the standard of classical economic theory based on rational agents and efficient markets. Previous research suggests that market performance operate the level of overconfidence and disposition effect because these factors shows excessive trading. We built a market-wide panel VAR model to investigate the lead-lag relationship between profitability and turnover and TSLS to check the disposition effect. Our results suggesting that investors are less overconfidence in the stock market of Karachi and disposition is also present in this stock exchange. Holding periods were longer for larger stocks and smaller for less illiquid stocks. Return of the security give effects on buy and sells level such as turnover. Hence we can say that overconfident traders mainly hold losers too long.