Using a proprietary database of currency trades, this paper explores the effects of trading gains and losses on risk-taking among large institutional investors. We find that institutional investors, unlike individuals, are not prone to the disposition effect. Instead, institutions aggressively reduce risk following losses and mildly increase risk following gains. This asymmetry is more pronounced later in the calendar year and among older and more experienced funds. We show that such performance dependence is consistent with dynamic loss aversion (Barberis, Huang, and Santos (2001)) and overconfidence. In addition, prior institutional gains and losses have palpable implications for future prices.
Finance and Financial Management | Portfolio and Security Analysis
Journal of Financial and Quantitative Analysis
Cambridge University Press
O'Connell, Paul G. J. and TEO, Melvyn.
Institutional Investors, Past Performance, and Dynamic Loss Aversion. (2009). Journal of Financial and Quantitative Analysis. 44, (1), 155-188. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2658
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.