This paper tests whether the “disposition effect”, which is the tendency of investors to ride
losses and realize gains, exists in the Korean index futures market. Using a unique database, I
find strong evidence for the disposition effect and explain this in terms of investor
characteristics. I also investigate the effect the disposition bias has on investment performance.
There are four main findings. First, individual investors are much more susceptible to the
disposition effect than institutional and foreign investors. Second, sophistication and trading
experience tend to reduce the disposition effect. Third, the disposition effect is stronger for long
positions than short positions. Finally, there is a negative relationship between the disposition
effect and investment performance. Besides, two findings that foreign investors outperform
domestic investors and trading frequently may not be hazardous to investor’s wealth in the
Korean index futures market are worth noting.
