The main question in this paper is that the excessive trading volume is caused by the overconfidence customers. The author makes hypotheses and carries out some tests in this essay to support the main question. This paper provides the accurate data and examples, moreover, some classical theories and formula also be mentioned. For testing the hypotheses, author has to focus on the overconfidence customers, and analyze them. Including why customers become overconfidence? How they usually do in the investment market? How they influence on the trading volume in the world?
There are five main parts in this essay, including "the data", "Empirical study", "returns pattern before and after transactions", "discussion" and "conclusion". It has the good link during these sections. Before the part of "the data" which is the literature review of this essay shows the economic background in the world and analyze the overconfidence customers. Nowadays there is more trading volume on the world’s market, but it is difficult to know what trading volume in market should be, because there is a lack of the economic models. At the same time, It is also difficult to know whether the trading volume is too high. In this situation, a particular group of investors is mentioned which is overconfidence customers, psychologists show that people usually overconfident about their abilities and knowledge. From the security selection, the overconfidence can be shown clearly, if the traders who have been successful in the past are easy to be overconfidence.
Moreover, the trading of discount brokerage customers can be used to test the overconfidence theory, because this essay shows that the overconfidence customers will meet more risk with the trading of discount brokerage in the investment market (Edward, 2008. Dictionary, 2009), when an investor more overconfidence, he will more trade and his expected utility will be lower. Furthermore the overconfidence customers always overestimate the profit, and misunderstand the information of the security, so the result of the investor is zero profit or net losses. A test in this paper is whether the trading profit overconfidence customer is enough to offset the trading cost. If can not offset the trading cost, it means the overconfidence customers usually loss money in the investment market.
The data in this essay were from the nationwide discount brokerage house, and there were ten thousand customers accounts randomly selected from all available accounts in 1987. And then records the transactions information, through analysis, gets the information about how many accounts loss or wins the profit, and women and men who trade more actively.
The purpose for investors is that increase the profit, In the aspect of methodology, this paper focus group of overconfidence customers, because this group of customers always misunderstands the information and overestimate the profit, so they usually can not cover the trading cost when the transaction finished. All these information was mentioned in the literature review, in this part, the deeper research will be carried out. In this situation, the formula was mentioned, in order to know how much money this group of customers’ loss or earn (CRSP: daily return for security).
Then it is necessary to carry out a test in this paper, and try to solve the question if customers purchase the securities with the similar size randomly, how likely is it that? So firstly it is necessary to know the average return to purchase securities, next compares it to the return of overconfidence customers. After these, basis to some formulas, the accurate data will be a powerful evidence to support how overconfidence customers influence on the investment market.
The table 1 shows all trading of the securities in the database. It also indicates when investors sell the security, they will lose some profit, because investors pay the transactions costs and maybe they buy underperform securities which they sell. Moreover, the table 1 also shows that investors should keep the sales and purchase of security in the same and smaller size, because high size means high risk, so this is also a method to reduce the risk in the investment market (Huang, 2009).
Next, the calendar- time portfolios in this paper was used to analyze the returns on calendar- time portfolios of securities purchased and sold in this data set. There are three steps should be done in this part. Firstly, according to the foregone data (Table 2), it can get the data about the net profit of the portfolios in average month. Secondly, use the capital asset pricing model and estimate how much profit can get, thirdly, an intercept test using the three- factor model for estimating the following monthly time-series regression.
Then, the security selection vs. marketing timing was introduced by the paper, it shows that investors should not do the poor choice which means spend more money to buy, but return on less money when sell them. In this situation, some model and formula can help investors to judge the choice, good or poor. And also can help investors to know the CRSP. Moreover, the author wants to test whether investors purchase and sell security from the market. During this part, the author critical evaluate the overconfidence customers and provide some suggestions to them.
At last, according to all the result of the testing in this paper, it is enough to prove the main question, from the result of the testing, people can know the overconfidence customers always misunderstand the security information, they usually have the poor choice of the security, they like to do the short line business, but they do not know how to avoid the risk, how much they investment is the best. So the overconfidence customers usually loss money on the investment market, and they usually trade too much in the market. In this case, author solves the main question successfully. But the author does not give some suggestions about the future research of this subject, and all data come from the nationwide discount brokerage house, so there is a lack of some data which is investigated by him.
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