We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid-ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid-ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities. Copyright 2007 by The American Finance Association.
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Volume (Year): 62 (2007) Issue (Month): 3 (06) Pages: 1313-1340 Download reference. The following formats are available: HTML
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