Date Published: January 27, 2014
Publisher: Public Library of Science
Author(s): Jian Zhang, Haocheng Wang, Limin Wang, Shuyi Liu, Rodrigo Huerta-Quintanilla.
Overtrading is a common anomaly among stock investors. This study examines the relationship between overtrading and investment returns and the impact of the Big Five traits and gender on overtrading in a unilateral trend stock market using a simulated stock investment system. The data were derived from a sample of undergraduates from six universities who performed in a simulated stock investment situation and had their personality traits measured by the Big Five Personality Questionnaire. The results indicate that: (1) Overtrading was significant in rising stock markets, but not significant in falling markets. (2) The degree of female investors who overtraded was significant in rising markets. (3) The degree of overtrading investors who were high in extroversion or agreeableness was significant in rising markets. The implications of these results for more effective investment strategies are discussed.
Overtrading is a common anomaly among stock investors, as observed in behavioral science research. As early as 1968, Jensen found that the returns of the most actively traded mutual funds were lower than the market rate of return . Barber et al.  conducted empirical studies examining individual investor trading results in systematic and economically large losses using a complete trading history of all investors in Taiwan. Most researchers seem to support the existence of overtrading. However, other studies, such as that led by Hiemstra and Jones , determined a significantly positive relationship between trading volume and returns, which indicate that investors did not overtrade because the more they traded, the more they earned.
The trading volumes of stock investors are always high, especially in the Chinese stock market. Because of these high trading volumes, many researchers assume that there is overtrading in the stock market. In this paper, we collected data from a simulated stock trading system and performed a statistical analysis on these data, finding that in unilaterally price-rising situations, there is a negative relationship between returns and trading volume. In other words, there was overtrading in the stock market. However, in unilaterally price-falling situations, there was no significant relationship between stock returns and trading volume, and overtrading did not occur. This result is consistent with Hypothesis 1, which stated that the investment situation would influence investing behavior, thus supporting the “disposition effect” and the “prospect theory” proposed by Shefrin and Statman  and Kahneman and Tversky , respectively. The disposition effect refers to investors who tend to sell a large amount of stock in unilaterally price-rising situations due to risk aversion, therefore trading too much, while in unilaterally price-falling situations, investors tend to hold stocks due to embracing risk, and do not trade as often.
Through analysis of the data collected in the simulated stock trading system, we observed that there is a significantly negative relationship between returns and trading volume in unilaterally price-rising situations, while there is no such relationship in unilaterally price-falling situations, which indicates overtrading in the former situation. The trading volume of male investors was significantly larger than that of female investors; however, males did not overtrade in unilaterally price-rising situations, while female investors did. Finally, there was no significant relationship between trading volume and the Big Five personality dimensions, but the returns of high-E investors and high-A investors were adversely affected by their trading volumes, which indicates overtrading by investors with high scores in extroversion and agreeableness.