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Rationalizing Trading Frequency and Returns

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  • Yosef Bonaparte
  • Russell Cooper
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    Abstract

    Barber and Odean (2000) study the relationship between trading frequency and returns. They find that households who trade more frequently have a lower net return than other households. But all households have about the same gross return. They argue that these results cannot emerge from a model with rational traders and instead attribute these findings to overconfidence. Using a dynamic optimization approach, we find that neither a model with rational agents facing adjustment costs nor various models of overconfidence fit these facts.

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    File URL: http://cadmus.eui.eu/dspace/bitstream/1814/14058/1/ECO_2010_25.pdf
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    Bibliographic Info

    Paper provided by European University Institute in its series Economics Working Papers with number ECO2010/25.

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    Date of creation: 2010
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    Handle: RePEc:eui:euiwps:eco2010/25

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    1. Kent D. Daniel, 2001. "Overconfidence, Arbitrage, and Equilibrium Asset Pricing," Journal of Finance, American Finance Association, vol. 56(3), pages 921-965, 06.
    2. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    3. Luigi Guiso & Tullio Jappelli, 2007. "Information Acquisition and Portfolio Performance," Economics Working Papers ECO2007/45, European University Institute.
    4. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
    5. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
    6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
    7. Yosef Bonaparte & Russell Cooper, 2009. "Costly Portfolio Adjustment," NBER Working Papers 15227, National Bureau of Economic Research, Inc.
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