Prior consequences and subsequent risk taking: New field evidence from the Taiwan Futures Exchange

Prior consequences and subsequent risk taking: New field evidence from the Taiwan Futures Exchange

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Article ID: iaor20103550
Volume: 56
Issue: 4
Start Page Number: 606
End Page Number: 620
Publication Date: Apr 2010
Journal: Management Science
Authors: , , ,
Keywords: stock market, Taiwan
Abstract:

We use a data set from market participants in the Taiwan Stock Exchange Capitalization Weighted Stock Index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking. In particular, investors in this market take above-average risks in afternoon trading after morning gains. The phenomenon is prevalent in all three types of market makers' accounts and across different types of market participants. Our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters (i.e., expected return, trading period, and curvature of the value function), because prospect theory can predict both increased and decreased levels of subsequent risk taking. We provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature.

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