Title: The disposition effect: Behavioural evidences from a quantile regression with fixed effects and attrition
Authors: Malvina Marchese - Cass Business School (United Kingdom) [presenting]
Richard Payne - Cass Business School (United Kingdom)
Abstract: The disposition effect is investigated in an under-researched, but increasingly important field: retail currency traders. Thanks to the properties of the FX market and the availability of a large panel of traders, we model the disposition effect as the skewness of the conditional distribution of traders' returns. We introduce a novel fixed effect estimator for quantile regression in dynamic panel with fixed effects and attrition and establish its finite sample properties via an extensive simulation exercise. We find that the WPIVQRFE estimator significantly reduces the bias arising from the incidental parameter problem. We propose a jack-knife type correction in large samples to obtain asymptotic normality. The results indicate that realizing a loss on one trading day significantly increases the disposition effect on the next trading day, consistent with investors becoming even less likely to close a loss-making position. This is strong evidence that the disposition effect cannot be adequately explained by pure preference-based theories, and must instead be attributed to behavioural effects.