Impact of price path on disposition bias

Abstract

Recent studies, in experimental markets, have illustrated the incremental influence of price path on investor decisions. We empirically demonstrate that the nature of price path significantly impacts the degree of disposition bias, after controlling for the level of returns and volatility, with investor-level high-frequency trade data from the commodities futures market. We find that following the experience of a favourable (unfavourable) price path, disposition bias among traders with Prospect Theory preferences declines (increases). Disposition bias in the market declines (increases) as an outcome of the decline (increase) in the propensity for gain realization, accompanied by a concurrent increase (decline) in the propensity for loss realization among traders. Our findings imply that the investor preferences, as well as their beliefs about the future price movements, inferred from the experienced price path, jointly influence their trading decisions.