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Dissecting the links among profitability, the disposition effect, and trading activity

Author

Listed:
  • Cheng, Teng Yuan
  • Lee, Chun I.
  • Lin, Chao Hsien

Abstract

We empirically dissect, at the individual trader level, the negative linkage between trading profitability and the disposition effect by tracking the trade-by-trade histories of traders on the Taiwan Futures Exchange (TAIFEX). In addition to the evidence that they exhibit the disposition effect, we find profitability is linked to whether traders have realized gains high enough to cover realized losses. We further demonstrate the opposing effects of active trading on profitability: traders with strong disposition effect suffer more losses as they trade more, but for traders who exhibit weak or reverse disposition effect the more actively they trade, the more profitable they are.

Suggested Citation

  • Cheng, Teng Yuan & Lee, Chun I. & Lin, Chao Hsien, 2024. "Dissecting the links among profitability, the disposition effect, and trading activity," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
  • Handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002688
    DOI: 10.1016/j.pacfin.2023.102197
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    More about this item

    Keywords

    Disposition effect; Profitability; Individual trader; Realized gain (loss);
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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