Trading Dynamics in the Foreign Exchange Market: A Latent Factor Panel Intensity Approach
Warwick Business School - Finance Group - Financial Econometrics Research Centre
University of Aarhus - CREATES
September 1, 2010
We develop a panel intensity framework for the analysis of complex trading activity datasets containing detailed information on individual trading actions in different securities for a set of investors. A feature of the model is the presence of a time varying latent factor, which captures the influence of unobserved time effects and allows for correlation across individuals.
We contribute to the literature on market microstructure and behavioral finance by providing new results on the disposition effect and on the manifestation of risk aversion on the high frequency trading level. These novel insights are made possible by the joint characterization of not only the decision to close (exit) a position, usually considered in isolation in the literature, but also the decision to open (enter) a position, which together describe the trading process in its entirety. While the disposition effect is defined with respect to the willingness to realize profits/losses with respect to the performance of the position under consideration, we find that the performance of the total portfolio of positions is an additional factor influencing trading decisions which can reinforce or dampen the standard disposition effect. Moreover, the proposed methodology allows the investigation of the strength of these effects for different groups of investors ranging from small retail investors to professional and institutional investors.
Number of Pages in PDF File: 43
Keywords: Trading Activity Datasets, Panel Intensity Models, Latent Factors, Efficient Importance Sampling, Behavioral Finance
JEL Classification: C33, C41, C50working papers series
Date posted: July 17, 2006 ; Last revised: September 30, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.422 seconds