The Effect of Investor Overconfidence on Trading Intensity in the Tehran Stock Exchange

Mohsen  Behzad Jazi; Hossein Sharifi Renani; Saeed  Daei Karimzade

Authors

Mohsen Behzad Jazi Department of Economics, Isf.C., Islamic Azad University, Isfahan, Iran Author https://orcid.org/0009-0005-6092-5456
Hossein Sharifi Renani Department of Economics, Isf.C., Islamic Azad University, Isfahan, Iran Author https://orcid.org/0000-0002-5072-3616
Saeed Daei Karimzade Department of Economics, Isf.C., Islamic Azad University, Isfahan, Iran Author https://orcid.org/0000-0001-9904-5054

Keywords:

Investor Overconfidence; Trading Intensity; Trading Turnover; Behavioral Finance; Investor Sentiment; Tehran Stock Exchange; Panel Data

Abstract

This study aimed to investigate the effect of investor overconfidence on subsequent trading intensity and related market outcomes among companies listed on the Tehran Stock Exchange. This applied, quantitative, ex post facto study used archival market data structured at the firm–week level. The initial database included 48 listed companies and 125,911 daily trading observations, while the final common sample comprised 11,242 firm–week observations from 45 companies after applying data-coverage criteria, constructing one-week leads, and aligning behavioral and control variables. Investor overconfidence was measured through a principal component analysis-based index constructed from weekly share turnover, relative trading frequency, and trading value relative to market capitalization. The first component explained 74.18% of the variance. Six subsequent-week outcomes were examined: stock return, trading turnover, trading value, trading frequency, individual-investor money flow, and volatility. Fixed-effects panel regressions controlled for investor sentiment, attention, herding, overreaction/underreaction, fear and greed, exchange-rate changes, firm size, and E/P. Statistical inference used two-way clustered standard errors, with Driscoll–Kraay covariance estimates and Benjamini–Hochberg adjustment as robustness procedures. Investor overconfidence significantly predicted higher subsequent trading turnover ( , ), trading value ( , ), trading frequency ( , ), individual-investor money flow ( , ), and volatility ( , ). Its effect on subsequent stock return was positive but nonsignificant ( , ). The significant relationships remained stable under Driscoll–Kraay estimation and after false discovery rate adjustment. Investor overconfidence in the Tehran Stock Exchange is primarily reflected in persistent increases in trading intensity and volatility rather than in a systematic improvement in subsequent stock returns, indicating that greater confidence encourages more extensive market participation without necessarily producing superior return outcomes.

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