The Disposition Effect and Investment Performance in the Futures Market

Abstract

This paper tests whether the disposition effect, which is the tendency of investors to ride losses and realize gains, exists in the Korean index futures market. Because we begin with every transaction made by all market participants over a 2-year period, the results have significant power to detect behavioral biases in trading behavior. Since previous papers use a particular investor database on a brokerage house, they have limitations to find behavioral biases and to interpret these results. We estimate the magnitude of the disposition effect for all market participants at the account-level as well as at the market-level. We examine the disposition effect across investor types and the relationship between the disposition effect and investor trading characteristics. We also analyze the disposition effect in short positions as well as in long positions, and test whether the disposition effect is a costly behavioral bias. Using a unique database, we find strong evidence for the disposition effect and explain this in terms of investor characteristics. We also investigate the effect the disposition bias has on investment performance. There are four main findings. First, individual investors are much more susceptible to the disposition effect than institutional and foreign investors. Second, sophistication and trading experience tend to reduce the disposition effect. Third, the disposition effect is stronger for long positions than short positions. Finally, there is a negative relationship between the disposition effect and investment performance. Besides, two findings that foreign investors outperform domestic investors and trading frequently may not be hazardous to investor's wealth in the Korean index futures market are worth noting.