Implications of the overconfidence bias in presence of private information: Evidence from MENA stock markets

This paper extends the empirical literature on overconfidence by investigating the implications of this bias on the trading activity and the market volatility for different levels of private information. Using individual data for 10 MENA stock markets, we found a positive unidirectional causal relation from market return to trading volume in most markets, indicating that overconfident investors attribute past market gains to their own talent in selecting securities and trade later as if they had generated these gains. Consistent with the hypothesis of the investors' overreaction to private information, we found that the trading activity becomes more excessive as the level of private information increases. Moreover, the overconfidence helps explain the observed excessive volatility in presence of high level of private information.