Financial Speculators' Underperformance: Learning, Self-Selection, and Endogenous Liquidity

Reza Mahani and Dan Bernhardt ()

Journal of Finance, 2007, vol. 62, issue 3, pages 1313-1340

Abstract: We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid-ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid-ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities. Copyright 2007 by The American Finance Association.

Date: 2007

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2007.01237.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:jfinan:v:62:y:2007:i:3:p:1313-1340

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

Journal of Finance is edited by Robert F. Stambaugh

More articles in Journal of Finance from American Finance Association
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().