Investment Risk and Disposition Effect: Evidence from the Trading Behavior of Institutional Investors in Korea

Abstract

This study investigates the trading behavior of institutional investors in Korea. The findings of this study are as follows. First, Korean investors are just as prone to the disposition effect as U.S. investors but less overconfident than U.S. investors. Second, bond fund shows a higher disposition effect than mixed and equity funds, suggesting that conservative investors tend to delay the needed changes in their portfolio composition when new information forces them to reanalyze the situation and prospects. Third, the disposition effect is sensitive to the reference point changes. Fourth, the disposition effect is positively associated with the length of the holding period, contradicting the findings of previous studies. Finally, the disposition effect in Korea disappears after the global financial crisis, suggesting that Korean investors trade more rationally since the crisis. Our findings indicate that the disposition effect is not a universal phenomenon. The results suggest that the degree of the disposition effect is very sensitive to the type of investor groups.