The Impact of Overconfidence Bias on Stock Trading Performance in the Banking Industry: a Comparative Analysis of Developed and Developing Countries

Tan, Celine Ker Xing (2025) The Impact of Overconfidence Bias on Stock Trading Performance in the Banking Industry: a Comparative Analysis of Developed and Developing Countries. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study explores how overconfidence bias affects stock trading performance in the banking sector. It compares three developed countries (Singapore, Hong Kong, and Japan) with three developing countries (Malaysia, Indonesia, and Thailand) over the period from 2016 to 2023. Overconfidence bias refers to investors’ tendency to overrate their knowledge and prediction ability. This behavior often leads to frequent trading, increased transaction costs, and higher risk exposure. To measure overconfidence, the study uses three behavioral proxies: trading frequency, turnover rate, and holding period. Stock trading performance is evaluated using trading volume, portfolio return, and risk exposure. Risk exposure is assessed by return volatility and beta. The analysis controls key macroeconomic variables such as interest rate, inflation rate, GDP growth, and market volatility index (VIX). Data are collected from Refinitiv Eikon, Macrotrends, and Trading Economics. The regression analysis using panel data methods, including pooled OLS, random effects, and fixed effects models, with the Hausman test used for model selection. Empirical findings indicate that trading frequency significantly increases trading volume, especially in developing countries. However, its effect on portfolio return is weak or insignificant. The turnover rate and holding period show limited influence on performance metrics. Among the control variables, inflation rate and GDP growth exhibit strong effects, with inflation negatively impacting performance and GDP positively influencing it. Overall, overconfidence appears to affect trading behavior more than actual trading outcomes, particularly in less regulated markets. The findings confirm that overconfidence bias impacts trading behavior and performance, with stronger effects in developing markets where regulation is weaker, and investor awareness is lower. This suggests that market maturity, education, and institutional quality play important roles in moderating behavioral biases. This study contributes to the literature on behavioral finance by focusing on a specific sector which refers to banking and by comparing results across different market structures. It offers practical implications for investors, banks, and regulators. By recognizing the role of overconfidence in trading decisions, market participants can develop better investment strategies and risk management frameworks. Policymakers can also design targeted interventions to improve financial literacy and reduce irrational trading behavior.