Are disposition effect and skew preference correlated? Evidence from account-level ELW transactions

This paper examines whether two well-known cognitive biases, disposition effect and skew preference, may reflect a common feature of certain investors. On the basis of a unique proprietary dataset that provides the details of all transactions in the Korean equity-linked warrant (ELW) market between 2009 and 2011, we find that investors who realize gains faster than losses are also more likely to trade out-of-the-money ELWs. Investors who are less (more) subject to both biases exhibit the best (worst) risk-adjusted trading performance. Our findings suggest that disposition effect and skew preference occur simultaneously, which could adversely affect trading performance.