We find that the disposition effect has an impact on market volatility and short-term return.
Using a comprehensive data covering over 60,000 investors in the Korean futures market, we
find that a higher disposition effect bias causes higher current and future market volatility from
a daily analysis. These results hold after controlling trading volume, volatility persistence,
potential endogeneity bias, and are robust to various volatility measures. We also find that the
increased disposition effect in the long (short) position has a tendency to decrease (increase)
asset prices over a short-term period. Our finding justifies the opinion that the disposition effect
has an impact on market volatility and prices, and is in line with Kogan, Ross, Wang, and
Westerfield (2006).
Keywords: Disposition effect; Price impact; Volatility; Irrational trader; Behavioral bias