A Detailed Investigation of the Disposition Effect and Individual Trading Behavior: A Panel Survival Approach

31 Pages Posted: 26 Jun 2006 Last revised: 20 Jun 2011

See all articles by Ingmar Nolte

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Date Written: June 16, 2011

Abstract

This paper uses a panel survival approach to analyze the trading behavior of foreign exchange traders. We concentrate on a detailed characterization of the shape of the disposition effect over the entire profit and loss regions. In doing so, we investigate the influence of a number of trading characteristics on the impact of the disposition effect. These trading characteristics include: special limit order strategies, trading success, size and the experience of our investors.

Our main findings are that i) the disposition effect has a non-linear shape. For small profits and losses we find an inverted disposition effect while for larger ones the usual positive disposition effect emerges. ii) The inverted disposition effect is driven to a great extend by patient and cautious investors closing their positions with special limit orders (take-profit and stop-loss). The normal positive disposition effect is found to be intensified for impatient investors closing their positions actively with market orders. iii) We show that unsuccessful investors reveal a stronger inverse disposition effect. iv) Evidence that bigger investors are less prone to the disposition effect than smaller investors is also found.

Keywords: Panel Survival Models, Trading Activity Dataset, Foreign Exchange Market, Behavioral Finance, Disposition Effect

JEL Classification: G10, F31, C32

Suggested Citation

Nolte, Ingmar, A Detailed Investigation of the Disposition Effect and Individual Trading Behavior: A Panel Survival Approach (June 16, 2011). Available at SSRN: https://ssrn.com/abstract=911528 or http://dx.doi.org/10.2139/ssrn.911528

Ingmar Nolte (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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