Title

Institutional Investors, Past Performance, and Dynamic Loss Aversion

Publication Type

Journal Article

Publication Date

9-2010

Abstract

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.

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial and Quantitative Analysis

Volume

44

Issue

1

First Page

155

Last Page

188

ISSN

0022-1090

Identifier

10.1017/S0022109009090048

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