Overconfidence Behavior and Dynamic Market Volatility: Empirical Evidence from the Vietnamese Stock Market

Abstract

This study examines the relationship between investor overconfidence and dynamic market volatility in the Vietnamese stock market, a frontier market distinguished by rapid growth and the dominance of individual investors. Although the overconfidence–volatility framework has been tested across many developed and emerging markets, Vietnam has remained largely unexamined despite exhibiting the speculative boom-and-crash cycles and heavy retail participation that make it a compelling case for behavioral analysis. Drawing on the frameworks of Chuang and Lee (2006) and Jlassi et al. (2014), we analyze daily VN-Index price and tradingvolume data from the Ho Chi Minh Stock Exchange (HOSE) over 2016–2025, comprising 2,497 observations. Log trading volume is decomposed via OLS regression on five lagged daily returns into an overconfidence-driven (overreaction) component and a non-overconfidence component, which are then incorporated into an EGARCH(1,1) model to assess their contributions to conditional volatility. The results support all three hypotheses. The overconfidence component has a positive and highly significant effect on conditional volatility (f₃ = 0.136, p < 0.01) that substantially exceeds that of the non-overconfidence component (f₄ = 0.004), indicating that behavioral trading is a primary driver of market instability. Volatility is highly persistent (f₂ = 0.950) and asymmetric, with negative shocks generating larger responses than positive shocks of equal magnitude (K = −0.153, p < 0.01). These findings extend the international overconfidence-volatility literature to an emerging market and highlight the role of investor psychology in shaping market risk.