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Article

Evidence on Dynamic Loss Aversion from Currency Portfolios

Kenneth Froot, John Arabadjis, Sonya Cates and Stephen Lawrence
The Journal of Portfolio Management Fall 2011, 38 (1) 60-68; DOI: https://doi.org/10.3905/jpm.2011.38.1.060
Kenneth Froot
is the André R. Jakurski Professor of Business Administration at Harvard University, founding partner of FDO Partners, and research director at State Street Associates in Cambridge, MA.
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  • For correspondence: ken.froot@fdopartners.com
John Arabadjis
is vice president and head of Investor Behavior Research at State Street Associates in Cambridge, MA.
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  • For correspondence: jsarabadjis@statestreet.com
Sonya Cates
is an assistant vice president in FX Investor Behavior Research at State Street Associates in Cambridge, MA.
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  • For correspondence: scates@statestreet.com
Stephen Lawrence
is vice president and head of FX Investor Behavior Research at State Street Associates in Cambridge, MA.
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  • For correspondence: sclawrence@statestreet.com
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Abstract

Currency investors exhibit a tendency to cut risk by pairing both longs and shorts following losses and a weaker tendency to add risk following gains. By differentiating between position-level, portfolio-level, and aggregate cross portfolio losses in currency investments, the authors demonstrate that this dynamic loss aversion spans multiple frames of reference. Losses are not compartmentalized, but rather a loss in one currency may impact trading in another. The authors also show that while the impact of a loss on subsequent trading decisions does linger, the effect declines sharply after a losing position is closed.

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The Journal of Portfolio Management: 38 (1)
The Journal of Portfolio Management
Vol. 38, Issue 1
Fall 2011
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Evidence on Dynamic Loss Aversion from Currency Portfolios
Kenneth Froot, John Arabadjis, Sonya Cates, Stephen Lawrence
The Journal of Portfolio Management Oct 2011, 38 (1) 60-68; DOI: 10.3905/jpm.2011.38.1.060

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Evidence on Dynamic Loss Aversion from Currency Portfolios
Kenneth Froot, John Arabadjis, Sonya Cates, Stephen Lawrence
The Journal of Portfolio Management Oct 2011, 38 (1) 60-68; DOI: 10.3905/jpm.2011.38.1.060
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  • Article
    • Abstract
    • REAL MONEY INVESTOR CURRENCY HOLDINGS AND TRADING ACTIVITY
    • BREAKEVEN EXCHANGE RATES AND CUMULATIVE PROFIT AND LOSS
    • RISK APPETITE AS A FUNCTION OF PAST LOSSES
    • CONCLUSION
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