Is Online Trading Gambling with Peanuts?
AbstractPrevious studies of investor behavior have documented that trading is harmful to the portfolio return, but have been unable to measure how important this underperformance is for the individual. By the use of detailed individual financial data, as well as trades from a Swedish online broker, I measure the cost of online trading. It is found that the more important the portfolio is, measured as the fraction of the investor's portfolio of total financial assets, the higher is turnover. In addition, financially important portfolios have slightly lower trading performance. The overall result suggest that the cost of online trading can be substantial. The top quintile of investors who have the highest share of their total financial assets in stocks invested at the brokerage firm under study loose 3.34% of financial wealth annually, which corresponds to 1.87% of aggregate income within this group. These investors do not only have lower overall wealth and income, but also have the highest aggregate trading losses. Therefore, trading losses are mainly carried by those who can afford them the least. Across individuals, annual losses for 36% of investors exceed 1% of their financial wealth, and 17% lose more than 5%.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 06-02.
Length: 32 pages
Date of creation: 27 Sep 2005
Date of revision:
Note: Financial support from Bankforskningsinstitutet and the Marie Curie Research Training Networks is highly appreciated.
Contact details of provider:
Postal: D-68131 Mannheim
Phone: (49) (0) 621-292-2547
Fax: (49) (0) 621-292-5594
Web page: http://www.sfb504.uni-mannheim.de/
More information through EDIRC
Web page: http://www.sfb504.uni-mannheim.de
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-03 (All new papers)
- NEP-FIN-2006-07-02 (Finance)
- NEP-FMK-2006-07-20 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sodini, Paolo & Campbell, John & Calvet, Laurent E., 2007.
"Down or Out: Assessing the Welfare Costs of Household Investment Mistakes,"
3122488, Harvard University Department of Economics.
- Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
- Calvet, Laurent & Campbell, John Y. & Sodini, Paolo, 2006. "Down or out: assessing the welfare costs of household investment mistakes," Les Cahiers de Recherche 832, HEC Paris.
- Calvet, Laurent E. & Campbell, John Y. & Sodini, Paolo, 2006. "Down or Out: Assessing The Welfare Costs of Household Investment Mistakes," Working Paper Series 195, Sveriges Riksbank (Central Bank of Sweden).
- Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2006. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," NBER Working Papers 12030, National Bureau of Economic Research, Inc.
- Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2006. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Harvard Institute of Economic Research Working Papers 2107, Harvard - Institute of Economic Research.
- Harrison Hong & Jose Scheinkman & Wei Xiong, 2005.
"Asset Float and Speculative Bubbles,"
122247000000000861, UCLA Department of Economics.
- Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- John R. Graham & Campbell R. Harvey & Hai Huang, 2005.
"Investor Competence, Trading Frequency, and Home Bias,"
NBER Working Papers
11426, National Bureau of Economic Research, Inc.
- John R. Graham & Campbell R. Harvey & Hai Huang, 2009. "Investor Competence, Trading Frequency, and Home Bias," Management Science, INFORMS, vol. 55(7), pages 1094-1106, July.
- Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-90, December.
- Shiller, Robert J., 1999.
"Human behavior and the efficiency of the financial system,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 20, pages 1305-1340
- Robert J. Shiller, 1998. "Human Behavior and the Efficiency of the Financial System," Cowles Foundation Discussion Papers 1172, Cowles Foundation for Research in Economics, Yale University.
- Robert J. Shiller, 1998. "Human Behavior and the Efficiency of the Financial System," NBER Working Papers 6375, National Bureau of Economic Research, Inc.
- William N. Goetzmann & Alok Kumar, 2005. "Why Do Individual Investors Hold Under-Diversified Portfolios?," Yale School of Management Working Papers ysm454, Yale School of Management.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carsten Schmidt).
If references are entirely missing, you can add them using this form.