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Institutional Investors, Past Performance, and Dynamic Loss Aversion

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  • O’Connell, Paul G. J.
  • Teo, Melvyn

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.

Suggested Citation

  • O’Connell, Paul G. J. & Teo, Melvyn, 2009. "Institutional Investors, Past Performance, and Dynamic Loss Aversion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 155-188, February.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:01:p:155-188_09
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    Cited by:

    1. Deeney, Peter & Cummins, Mark & Dowling, Michael & Bermingham, Adam, 2015. "Sentiment in oil markets," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 179-185.
    2. Cici, Gjergji & Gehde-Trapp, Monika & Göricke, Marc-André & Kempf, Alexander, 2014. "What they did in their previous life: The investment value of mutual fund managers' experience outside the financial sector," CFR Working Papers 14-11, University of Cologne, Centre for Financial Research (CFR).
    3. repec:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500360 is not listed on IDEAS
    4. Maria Camila De-La-Hoz & Carlos Pombo & Rodrigo Taborda, 2018. "Does board diversity affect institutional investor preferences? Evidence from Latin America," DOCUMENTOS CEDE 015991, UNIVERSIDAD DE LOS ANDES-CEDE.
    5. repec:eee:phsmap:v:495:y:2018:i:c:p:30-39 is not listed on IDEAS
    6. Chou, Robin K. & Wang, Yun-Yi, 2011. "A test of the different implications of the overconfidence and disposition hypotheses," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2037-2046, August.
    7. Liao, Li-Chuan & Chou, Ray Yeutien & Chiu, Banghan, 2013. "Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 72-91.
    8. Alexander Puetz & Stefan Ruenzi, 2011. "Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(5-6), pages 684-712, June.
    9. Dowling, Michael & Cummins, Mark & Lucey, Brian M., 2016. "Psychological barriers in oil futures markets," Energy Economics, Elsevier, vol. 53(C), pages 293-304.
    10. repec:pal:assmgt:v:17:y:2016:i:1:d:10.1057_jam.2015.38 is not listed on IDEAS
    11. repec:eee:finana:v:52:y:2017:i:c:p:77-87 is not listed on IDEAS
    12. Cici, Gjergji, 2011. "The prevalence of the disposition effect in mutual funds' trades," CFR Working Papers 11-05 [rev.], University of Cologne, Centre for Financial Research (CFR).
    13. Cummins, Mark & Dowling, Michael & Lucey, Brian M., 2015. "Behavioral influences in non-ferrous metals prices," Resources Policy, Elsevier, vol. 45(C), pages 9-22.
    14. Chen, XiaoHua & Lai, Yun-Ju, 2015. "On the concentration of mutual fund portfolio holdings: Evidence from Taiwan," Research in International Business and Finance, Elsevier, vol. 33(C), pages 268-286.
    15. Huang, Yu Chuan & Chan, Shu Hui, 2014. "The house money and break-even effects for different types of traders: Evidence from Taiwan futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 1-13.
    16. Noman, Abdullah & Naka, Atsuyuki & Zirek, Duygu, 2017. "Examining return predictability of industry style portfolios with prior return relative to a benchmark," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 193-203.
    17. Mark Cummins & Brian M. Lucey & Michael M. Dowling, 2014. "Behavioral Influences in Non-Ferrous Metals Prices," The Institute for International Integration Studies Discussion Paper Series iiisdp459, IIIS.
    18. Ines Fortin & Jaroslava Hlouskova, 2015. "Downside loss aversion: Winner or loser?," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 81(2), pages 181-233, April.

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