DIFFERENCES OF OPINION,OVERCONFIDENCE, AND THE HIGH‐VOLUME PREMIUM

We argue that both differences of opinion and overconfidence lead to high‐volume shocks. However, a high‐volume shock induced mainly by differences of opinion (overconfidence) will lead to superior (inferior) stock returns. Empirically, Asian financial markets, in contrast to U.S. markets, reveal weaker and inconsistent high‐volume premiums. The inconsistency may be attributable to investor's overconfidence. Additional evidence based on U.S. data supports this view, as a high‐volume shock accompanied by increased institutional ownership yields substantially higher high‐volume premiums than otherwise, and high‐volume premiums generally are much stronger in down‐market states than up‐market states.