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Are disposition effect and skew preference correlated? Evidence from account‐level ELW transactions

Youngsoo Choi, Woojin Kim () and Eunji Kwon

Journal of Futures Markets, 2020, vol. 40, issue 2, 228-246

Abstract: This paper examines whether two well‐known cognitive biases, disposition effect and skew preference, may reflect a common feature of certain investors. On the basis of a unique proprietary dataset that provides the details of all transactions in the Korean equity‐linked warrant (ELW) market between 2009 and 2011, we find that investors who realize gains faster than losses are also more likely to trade out‐of‐the‐money ELWs. Investors who are less (more) subject to both biases exhibit the best (worst) risk‐adjusted trading performance. Our findings suggest that disposition effect and skew preference occur simultaneously, which could adversely affect trading performance.

Date: 2020
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