The Cross-Section of Speculator Skill: Evidence from Day Trading
Brad M. Barber
University of California, Davis
Peking University - Guanghua School of Management
National Chengchi University (NCCU) - Department of Finance and Banking
University of California, Berkeley - Haas School of Business
December 31, 2012
We document economically large cross-sectional differences in the before- and after-fee returns earned by speculative traders. We establish this result by focusing on day traders in Taiwan from 1992 to 2006. We argue that these traders are almost certainly speculative traders given their short holding period. We sort day traders based on their returns in year y and analyze their subsequent day trading performance in year y 1; the 500 top-ranked day traders go on to earn daily before-fee (after-fee) returns of 61.3 (37.9) basis points (bps) per day; bottom-ranked day traders go on to earn daily before-fee (after-fee) returns of -11.5 (-28.9) bps per day. The spread in returns between top-ranked and bottom-ranked speculators exceeds 70 bps per day. However, less than 1% of the total population of day traders is able to predictably and reliably earn positive abnormal returns net of fees. Our results contribute to the evidence that cross-sectional variation in investor skill is an important feature of financial markets.
Number of Pages in PDF File: 44
Keywords: day traders, individual investors, market efficiency
JEL Classification: G12, G14working papers series
Date posted: April 15, 2004 ; Last revised: February 24, 2013
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