Hsiang-Hsi Liu^1,, Fei-Jen Kan¹

This research specifically incorporates the impact of the disposition effect of trading volume into the model construction to more accurately verify the overconfidence behavior of investors in the Taiwan stock market. Based on the theoretical framework and related literature of overconfidence and disposition behavior, we propose the hypothesis to be test and further uses Taiwan stock price index with a turnover rate and return rate after removing the weekly effect for about ten-year data, and construct a tri-variate VAR-GARCH model to examine the investor overconfidence behavior and disposition effect of Taiwan stock market. The empirical results indicate that investors in the Taiwan stock market do have a tendency to overconfidence and are easily affected by the market environment. According to the risk of market capitalization, overconfident investors are not necessarily inclined to hold higher risk stocks. In addition to overconfidence behavior, investors in the Taiwan stock market also have a significant disposition effect, indicating that investors cannot rationally judge the timing of selling or purchasing their stocks. By recognizing this relationship and analyzing the biased trends from overconfidence and disposition effect in trading volumes and returns, such knowledge can help the investors/practitioners to develop strategies and take appropriate measures.

overconfidence behavior, disposition effect, prospect theory, behavioral finance, VAR-GARCH model