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

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  • Youngsoo Choi
  • Woojin Kim
  • Eunji Kwon

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.

Suggested Citation

  • Youngsoo Choi & Woojin Kim & Eunji Kwon, 2020. "Are disposition effect and skew preference correlated? Evidence from account‐level ELW transactions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(2), pages 228-246, February.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:2:p:228-246
    DOI: 10.1002/fut.22055
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    References listed on IDEAS

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