The disposition effect and investment performance in the futures market

This study examines whether the disposition effect (DE), i.e., the tendency of investors to ride losses and realize gains, exists in the Korean stock index futures market. Using a unique database, we find strong evidence for the DE and explain this in terms of investor characteristics. We also inves...

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Bibliographic Details
Published in:The journal of futures markets 2009-06, Vol.29 (6), p.496-522
Main Authors: Choe, Hyuk, Eom, Yunsung
Format: Article
Language:English
Subjects:
Financial engineering
Futures
Futures market
Investment decision
Investments
Investors
Portfolio management
Portfolio performance
Realized gains & losses
South Korea
Stock index futures
Studies
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Summary:This study examines whether the disposition effect (DE), i.e., the tendency of investors to ride losses and realize gains, exists in the Korean stock index futures market. Using a unique database, we find strong evidence for the DE and explain this in terms of investor characteristics. We also investigate the effect that the disposition bias has on investment performance. There are four main findings. First, individual investors are much more susceptible to the DE than institutional and foreign investors. Second, sophistication and trading experience tend to reduce the DE. Third, the DE is stronger in long positions than in short positions. Finally, there is a negative relationship between the DE and investment performance. This result is consistent with Odean (1998, Journal of Finance, 53, 1775–1798), but contrasts with Locke and Mann (2005, Journal of Financial Economics, 76, 401–444) who find no evidence of any contemporaneous measurable costs associated with the DE. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:496–522, 2009
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.20398