Theory of overconfidence states that investors are highly overconfident when valuing the stocks.
Self-attribution has been found by the researchers as the root cause for overconfidence bias in
investors. Investors attribute the high stock prices and returns with their own art of picking up the stocks, and thus
they trade more frequently. In order to test overconfidence and self-attribution Vector Autoregressive (VAR) model
has been employed to find out the long-term relationship between endogenous variables: market return and market
turnover and exogenous variables: volatility and dispersion.
Results revealed that there exists a strong positive relationship
between market returns and trading turnover. Also, the crosssectional standard deviation in market prices i-e volatility and
the cross-sectional variation in stock returns i-e dispersion has
a very strong impact on trading pattern and returns. Since
investment decisions made by Pakistani investor largely
depend upon psychological factors, giving less weightage to
all the fundamentals, the trading pattern exhibited may
collectively tend the market behave in an irrational manner.
1-Syeda Faiza Urooj Assistant Professor, Department of Commerce, Federal Urdu University of Arts Science & Technology, Islamabad, Pakistan.2-Nosheen Zafar Accounts Officer, Accountant General Pakistan Revenue, Islamabad, Pakistan.3-Muzammal Ilyas Sindhu Lecturer, Department of commerce, Federal Urdu University of Science and Technology, Islamabad, Pakistan
Stock Returns, Volatility, Overconfidence, Self-Attribution, Vector Auto-Regressive Model