PRIOR TRADING OUTCOMES AND SUBSEQUENT PORTFOLIO RISKS: USING SECURITIES DEALER IN TAIWAN AS AN EXAMPLE

Yong-Chin Liu, Hsiang-Ju Chen and Wei-Ting Hsu
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Yong-Chin Liu: Department of Finance, Asia University, and Department of Medical Research, China Medical University Hospital, China Medical University, Taichung, Taiwan
Hsiang-Ju Chen: Department of International Trade and Business, National Taichung University of Science and Technology, Taiwan
Wei-Ting Hsu: Department of Finance, Asia University, Taiwan

Annals of Financial Economics (AFE), 2020, vol. 15, issue 03, 1-30

Abstract: This study examines whether the investment behavior of securities dealers is consistent with the predictions of the house money and break-even effects. Using the stock portfolios, dealers hold in Taiwan from 1996 to 2013 as a sample, we test the relationship between trading gains/losses and subsequent changes in portfolio risk. The results show that only gains with low risks, not all gaining situations, cause subsequent risk preferences, and regardless of the size of the trading loss, there is not a significant change in subsequent risk. Controlling dealers’ characteristics, industry competition, and the stock market condition, the evidence shows that the house money effect on dealer behavior exists after earning low-risk profits and does not support the break-even effect. These results are qualitatively unchanged after robustness checks that primarily exclude dealer overconfidence effect and ensure that the risk-taking behavior under low risks results in a decrease in gains and thus not a rational behavior.

Keywords: House money effect; break-even effect; behavioral finance; securities dealer; risk taking (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2010495220500128

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