Behavioral finance: Overconfidence hypothesis and evidence from Istanbul Stock Exchange

Efficient market hypothesis assumes that people are fully rational. However findings contradicting with this assumption, anomalies , are detected in real-world empirical studies. After these findings, researchers attempt to find alternative explanations and by this way behavioral finance is started to be developed. This thesis has been constructed to examine overconfidence hypothesis which is a sub-title of behavioral finance.In this thesis, overconfidence hypothesis is characterized by following two testable hypotheses. Based on first hypothesis, market gains are expected to increase investors? overconfidence and as a result of this, investors trade more in subsequent period. Based on second hypothesis, excessive trading of overconfident investors contributes to volatility. In empirical analysis, existence of overconfidence hypothesis in ISE is tested by benefiting from the methodology used by Chuang and Lee (2006) for the period between April 1991 and Jan 2011. In the findings of research, a positive causality is found from return to trading volume as overconfidence hypothesis foresees. However, conditional volatility is not found as increasing with trading volume caused by overconfidence. Because of that reason, result of research is not found as consistent with overconfidence hypothesis. This thesis is considered as contributing to literature of overconfidence hypothesis in Turkey by using ISE-100 index that has not been used in similar studies before.