Overconfidence Bias, Trading Volume and Returns Volatility : Evidence from Pakistan

Investor overconfidence has been proposed to explain various anomalous findings in security markets. The theory of investor overconfidence provides testable implications assuming investor overestimation of their abilities and private information and biased self-attributions. High (low) trading activity following market gains (losses) and excessive volatility are the two testable implications among others. We test these implications in Karachi Stock Exchange, Pakistan using multivariate time series analysis. Consistent with overconfidence hypothesis predictions, we find significant positive relationship between current trading activity and past returns after controlling for returns dispersion and returns volatility. However, we do not find significant positive contribution of overconfidence related trading to conditional returns volatility