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RFS Advance Access originally published online on March 2, 2006
Review of Financial Studies 2006 19(4):1531-1565; doi:10.1093/rfs/hhj032
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Investor Overconfidence and Trading Volume

Meir Statman
Leavey School of Business, Santa Clara University

Steven Thorley
Marriott School of Management, Brigham Young University

Keith Vorkink
Marriott School of Management, Brigham Young University

Address correspondence to Steven Thorley, 632 TNRB, BYU, Provo, UT 84602-3133, or email: steven.thorley{at}byu.edu.

The proposition that investors are overconfident about their valuation and trading skills can explain high observed trading volume. With biased self-attribution, the level of investor overconfidence and thus trading volume varies with past returns. We test the trading volume predictions of formal overconfidence models and find that share turnover is positively related to lagged returns for many months. The relationship holds for both market-wide and individual security turnover, which we interpret as evidence of investor overconfidence and the disposition effect, respectively. Security volume is more responsive to market return shocks than to security return shocks, and both relationships are more pronounced in small-cap stocks and in earlier periods where individual investors hold a greater proportion of shares. (JEL G11, G12)


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