Rationalizing Trading Frequency and Returns

Yosef Bonaparte and Russell Cooper

No ECO2010/25, Economics Working Papers from European University Institute

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.

Date: 2010
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