House Money Effect: Evidence from Market Makers at Taiwan Futures Exchange
56 Pages Posted: 19 Mar 2006
Date Written: April 2006
Abstract
We document empirical support for the 'house money' effect proposed by Thaler and Johnson (1990). Market makers for Taiwan' TAIEX index options tend to take above-average risks in afternoon trading after above-average morning gains. The fraction of market makers with better-than-average morning performance influences market-level liquidity and volatility in the afternoon trading. Our findings confirm that prior outcome influences subsequent risk-taking and emphasize that how investors frame previous outcomes influences their subsequent attitude toward risks.
Keywords: House money effect, market maker, derivatives, investor behavior
JEL Classification: G10 G13 G15
Suggested Citation: Suggested Citation
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