The Empirical Research Of The Overconfidence Differences Between Individual And Institutional Investors In Chinese Stock Market

It is difficult for the traditional financial theory to explain theabnormal phenomena existing in the stock market.This will make thescholars dare to broaden their horizon and break through the oldperception.As this background,behavioral finance which mix psychologyinto the finance has been growing rapidly.The hypothesis of the rationalinvestor in the traditional finance had been doubted,on thecontrary,investors always have cognitive deviations and the overconfidenceis one of them.The research about overconfidence has graduallyperfect,however,there are still many problems to study and solve.This paperwill discuss the difference in overconfidence trading behavior betweenindividual investors and institutional investors and will analyse the reasonof this diversity.On the basis of Gervais and Odean’s（2001）return effect hypothesis，which means that investors always attribute their success in the stockmarket to the information they obtained and their own comprehensiveability，on the contrary，they attribute the failure to objective reasons. The accumulated returns make them more overconfident and they will trademore aggressively. To analyse the difference between individual andinstitutional traders’ overconfident trading behaviors，the sample stockswill be classified according to institutional ownership. Classification alsowill be in consideration of market capitalization.First，this paper will test ifthe Chinese stock market exist overconfidence and the result is yes. Bothinvestors will trade more after high returns than low returns. It illustratedthat high returns stimulate the investors’ trading desire. Furhermore，in thesame capitalization，the individual investors are more overconfident thaninstitutional investors. This result provides the most important basis for thefurther study. After that more rigorous research method will be applied toanalyse the difference between individual and institutional traders’overconfident trading behaviors.On the basis of Statman，Thorley’s（2006）overconfident tradinghypothesis, this paper try to analyse the difference between individual andinstitutional traders’ confident trading behaviors by investigating causalrelation between lagged market returns and current volume. In order to go deep into this issue, their distinct behavior on the conditions of diversemarket states，market volatility，and the risk degree of stock the trade willbe observed. The paper find that overconfidence is existent in bothinvestors，moreover，both of them trade more aggressively followingmarket gains in bull market，in high-volatility market，in more riskiersecurities following market gains. But the important point is that individualinvestors perform more overconfident in all three conditions thaninstitutional investors. So these demonstrations mainly can support theviewpoint that individual investors is more overconfident than institutionalinvestors.Soon afterwards， The finding that individual investors alwaysoverestimate the private information more than institutional investors mayaccount for their different overconfident trading behavior. The privateinformation always make a bigger shock to the individual investors’ tradingbehavior than the institutional investors’. Respecting the above-mentionedfacts，the reason of the difference between individual and institutionaltraders’ overconfident trading behaviors can will be explained.