Overconfidence and turnover: Evidence from the Karachi Stock Exchange

Abstract

High trading volume is a common phenomenon in global financial markets. The most prominent explanation of excess trading volume is overconfidence. High market returns make investors overconfident and as a consequence, these investors trade more subsequently. The aim of this paper is to check if investors in Karachi stock exchange suffer from the overconfidence bias. We construct VAR model and impulse response function to investigate the relationship between return and turnover, the presence of which can be considered as evidence of overconfidence. Our results suggest that investors are indeed overconfident in the Karachi stock exchange.

Keyword: Overconfidence, Turnover, Volatility, VAR