Overconfidence, turnover, and return: evidence from the Brazilian market

Abstract

Finance literature has shown evidence of a positive relationship between trading volume and stock returns. This relationship can be explained by the concept of overconfidence within the behavioral finance literature, which postulates that when positive returns occur, investors tend to trade more often, driven bymarket overconfidence. This study analyzes how the relationship (both lagged and contemporaneous) between return and volume (measured by turnover) based on the methodology of Statman et al. (2006) occurs. All stocks traded at BM&FBovespa along the period January 1995 to December 2012 were included in the sample. The main result of this paper emphasizes the exis-tence of a positive relationship between turnover and return (both lagged and contemporaneous) only for stocks with small market capitalization.