An Overconfident Market Environment - A Place for Irrational Noise Trading

Compared to developed foreign capital markets, the Chinese A-share market is not always efficient. In most cases, noise trading by investors using misinformation does not generate excess returns for them and can even lead to losses. However, in somewhat overconfident market environments such as the one studied in this paper, noise trading can lead to positive returns in a bull market that develops after the end of a bear market with persistent pessimistic market sentiment starting with a major short-term negative event. This paper selects the time period that fits the above description, combines the theoretical basis of behavioral finance, analyses and compares the performance of investment agents with different noise levels in general and specific market environments, and analyses the correlation between overall market noise trading risk and excess returns in different market environments through regressions, finally concluding that the additional noise trading risk borne by investors in an overconfident market environment risk can earn them excess returns.