Trading and Under-Diversification
Institute for Financial Research
April 25, 2008
Forthcoming, Review of Finance
AFA 2007 Chicago Meetings Paper
EFA 2007 Ljubljana Meetings Paper
This paper documents a link between trading and diversication by using detailed trading records from a Swedish discount broker matched to individual tax records. Investors' diversification is measured by stake size, defined as the fraction of their risky financial wealth invested in individual stocks at the broker under study. High stake investors have concentrated portfolios, trade more, and achieves lower trading performance. They share several features with those who trade excessively: they have lower income, wealth, age, and education, suggesting that they lack investment expertise. The results directly imply that trading losses in the cross-section mainly are borne by those who can least afford them.
Number of Pages in PDF File: 52
Keywords: Investor behavior, stock trading, overconfidence, under-diversification
JEL Classification: G11, D14, C24Accepted Paper Series
Date posted: January 16, 2006 ; Last revised: July 10, 2012
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