Abstract
The main objective of the research is to examine the excessive trading hypothesis, investors who have higheroverconfidence shown by high miscalibration levels will tend to practice aggresive and excessive tradingstrategy. It is an experimental research which combines both between and within subject design. The participantsare undergraduate students who have already taken financial management course but have not yet invest in realcapital market. The result of the research shows that high overconfidence investors have higher trading activitythan low overconfidence investor. The other result shows that among high overconfidence investors, there is notrading activity differences between pre and post bad news, whereas among low overconfidence investors, theexistence of bad news cause trading activity to decrease in the post bad news period. Then, the investmentreturns of high overconfidence investors is significantly lower than that of the low overconfidence investors.
Highlights
The other result shows that among high overconfidence investors, there is no trading activity differences between pre and post bad news, whereas among low overconfidence investors, the existence of bad news cause trading activity to decrease in the post bad news period
In the Initial Public Offering (IPO) research, Sembel (1996) find that trading value has a positive correlation with IPO initial return, and the IPO initial return has a negative correlation with the long-term performance
This study tries to examine the effects of overconfidence behavior on trading activity of investors proxied by trading frequency and volume, to test the influence of bad news on trading activities at different levels of overconfidence, and to test the effect of overconfidence on the investors’ investment returns
Summary
While other studies have found that high overconfidence behavior affected the frequency and the volume of trading in the stock market. Kirchler and Maciejovsky (2002) argue that the overconfidence investors who trade too much will experience reduced outcome (earnings) and often invest in stocks that have negative earnings. The investors who have high overconfidence tends to ignore the risk from the information because they have their own beliefs about choice, so that such information should not affect trading activity. This study tries to examine the effects of overconfidence behavior on trading activity of investors proxied by trading frequency and volume, to test the influence of bad news on trading activities at different levels of overconfidence, and to test the effect of overconfidence on the investors’ investment returns. Our study uses experiment design that combine both between and within subject design, employing software of trading simulation
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