Nolte, I. and Voev, V.. (2011) Trading Dynamics in the Foreign Exchange Market: A Latent Factor Panel Intensity Approach. Journal of Financial Econometrics, Vol.9 (No.4). pp. 685-716. ISSN 1479-8409

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Abstract

We develop a panel intensity framework for the analysis of complex trading activity datasets containing detailed information on individual trading actions in different securities for a set of investors. A feature of the model is the presence of a time-varying latent factor, which captures the influence of unobserved time effects and allows for correlation across individuals. We contribute to the literature on market microstructure and behavioral finance by providing new results on the disposition effect and on the manifestation of risk aversion on the high-frequency trading level. These novel insights are made possible by the joint characterization of not only the decision to close (exit) a position, usually considered in isolation in the literature, but also the decision to open (enter) a position, which together describe the trading process in its entirety. While the disposition effect is defined with respect to the willingness to realize profits/losses with respect to the performance of the position under consideration, we find that the performance of the total portfolio of positions is an additional factor influencing trading decisions that can reinforce or dampen the standard disposition effect. Moreover, the proposed methodology allows the investigation of the strength of these effects for different groups of investors ranging from small retail investors to professional and institutional investors.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of Financial Econometrics
Publisher:	Oxford University Press
ISSN:	1479-8409
Date:	2011
Volume:	Vol.9
Number:	No.4
Number of Pages:	32
Page Range:	pp. 685-716
Identification Number:	10.1093/jjfinec/nbq033
Status:	Not Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/39577

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