Abstract
Overconfidence is one of the most robust behavioral anomalies in financial markets. By attributing investment gains to their ability, investors become overconfident and trade aggressively in subsequent periods. Evidence from stock markets shows that overconfidence leads to excessive trading and, subsequently, inferior investment performance. However, studies on overconfidence effect are lacking in the real estate sector, which is particularly true for Asia Pacific real estate investment trust (REIT) markets. Thus, this study examines the overconfidence effect in six Asia Pacific REIT markets, namely, Australia, Hong Kong, Japan, Singapore, South Korea, and Taiwan. The study finds that the overconfidence effect is more conspicuous during market boom periods or in inefficient market conditions. In addition, simulation analysis demonstrates that overconfidence could lead to rather large volumes of excessive trading activities in certain markets. Findings are robust across the alternative measures of control variables. Moreover, the policy implications of the research are also discussed.
Highlights
Economists have long found it difficult to justify investors’ enthusiasm for active trading in financial markets
The coefficient loadings of the two control variables are significant with expected signs in most of the markets
These findings offer general support to certain alternative explanations of return–turnover relationship, which is consistent with existing findings in the trading volume literature
Summary
Economists have long found it difficult to justify investors’ enthusiasm for active trading in financial markets. Evidence affirms that investors regularly trade too frequently, especially in bull markets (Griffin et al 2007; Odean 1999; Shiller 1981, 1983). Such active trading behavior is significantly related to poor subsequent investment performance (Barber et al 2009; Barber and Odean 2000, 2001; Kuo and Lin 2013). Evidence validates that overconfidence has significant implications on investment decisions, such as saving behaviors and motives (Sakalaki et al 2005), retirement planning (Parker et al 2012), stock trading frequency (Glaser and Weber 2007; Statman et al 2006), and stock market participation (Xia et al 2014). Overconfidence negatively affects investment performance (Daniel et al 1998; Hanauer 2014; Janus et al 2013)
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