Overconfidence Bias and Overreaction to Private Information Signals: The Case of Tunisia

Motivated by psychological and experimental studies on overconfidence bias, several theoretical and empirical studies showed that overconfident investors overreact to their private signals and, therefore, trade excessively causing price deviation from rational level and excessive return volatility. I have examined this hypothesis in the Tunisian Stock Market by testing the causality between the trading volume and the conditional return volatility in the absence of public information. The results indicate that the overconfidence/overreaction hypothesis is confirmed only for one third of the firms composing our sample.