The overconfident trading behavior of individual versus institutional investors

•Investors trade more overconfidently in high market return regimes than in low.•Overconfident trading behavior is stronger when the market is up and more liquid.•Individual investors trade with more overconfidence than institutional investors.

A double-threshold GARCH model is employed to simultaneously investigate the relative degree of overconfident trading of individual versus institutional investors and the impact of their overconfident trading on stock return volatility across high and low market return regimes. The results show that both individual and institutional investors trade more overconfidently in high market return regimes than in low, which corresponds to the finding that the return volatility is also higher in high market return regimes compared to low regimes. Conditional on the market state, market volatility, and market liquidity, it is believed that both individual and institutional investors exhibit more pronounced overconfident trading behavior when the market is up, less volatile, and more liquid across market return regimes. Finally, we obtain consistent evidence that individual investors trade with more overconfidence than institutional investors in these market conditions during high market return regimes, indicating that individual investors are more overconfident traders than institutional investors.