Overconfidence Behavior and Dynamic Market Volatility: Evidence from International Data

Abstract

This paper examines the effect of overconfidence behaviour on dynamic market volatility in global financial markets. Using daily data from 27 countries spanning over 2000-2012, we find that the overconfidence is more pronounced for the advanced markets relatively to the emerging ones. With the exception of some Asian and Latin American markets overconfidence is present in both up and down markets. Evidence suggests that overconfidence is the main incentive that triggered and prolonged the global financial crisis in the US market and in other continents. Finding shows that overconfidence still exists even during the recession period, but at different levels.