Trading and Under-Diversification
51 Pages Posted: 16 Jan 2006 Last revised: 18 Jun 2013
Date Written: April 25, 2008
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.
Keywords: Investor behavior, stock trading, overconfidence, under-diversification
JEL Classification: G11, D14, C24
Suggested Citation: Suggested Citation