article · Research in International Business and Finance
This research revisits the concept of investor overconfidence, which can lead to excessive trading and market inefficiencies. Using a novel methodology, the study investigated the causal relationship between stock returns and trading volume, specifically covering the COVID-19 pandemic period. A nonlinear Granger causality approach, based on multilayer feedforward neural networks, was applied to daily S&P 500 index data from 2016 to 2021. The findings provide evidence of overconfidence among investors, a behaviour that may be connected to an increase in the number of market participants. However, the study also observed a decline in the rate of returns during this period, suggesting uncertainty caused by the pandemic.
Understanding investor overconfidence is crucial because it can distort market efficiency and lead to suboptimal investment decisions. This research sheds light on how investor behaviour, especially during significant global events like a pandemic, influences market dynamics, offering insights for both individual investors and financial regulators.
This is foundational research into investor behaviour and market dynamics. The abstract does not indicate a direct application pathway for commercialisation, but its findings could inform risk management strategies or educational programmes for investors.
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Investor overconfidence leads to excessive trading due to positive returns, causing inefficiencies in stock markets. Using a novel methodology, we build on the previous literature by investigating the existence of overconfidence by studying the causal relationship between return and trading volume covering the COVID-19 period. We implement a nonlinear approach to Granger causality based on multilayer feedforward neural networks on daily returns and trading volumes from 2016 to 2021, covering 1424 daily observations of the S&P 500 index. The results provide evidence of overconfidence among investors. Such behavior may be linked to the increase in the number of investors. However, there is a decline in the rate of returns during the study period, implying uncertainty caused by the COVID-19 pandemic. Data available on request from the authors
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DOI: 10.1016/j.ribaf.2023.102028
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