Adaptive Market Hypothesis And Overconfidence Bias

Abstract

This paper examines the effect of excessive investor confidence on market efficiency. We study this impact for 21 developed markets and 25 emerging markets for a period from January 2006 until June 2020. First, we estimate weak market efficiency using the auto-correlation test (Ljung-Box, 1978). Thus, based on the adaptive approach, we assume that the overconfidence of investors has a negative impact on market efficiency. Concerning the over-confidence variable; we use the transaction volume decomposition method of Chuang and Lee (2006). Finally, we used the logit panel model to study the impact the impact of investor overconfidence on market efficiency. The result shows that during our study period, the trust bias had no impact either on the efficiency of developed markets or on the efficiency of emerging markets. We attribute this result to successive crises during our study period, including the subprime crisis, the eurozone crisis, the stock market crash in China, and the COVID crisis, which likely caused investors to become pessimistic and lose confidence in the stock market.