Degree Name

Doctor of Philosophy (PhD)


School of Accounting and Finance - Faculty of Commerce


There is a large growing body of literature in finance highlighting anomalies in the behaviour of individual investors, which violate the axioms of rationality. However, much of the research draws upon the experimental findings of cognitive psychologists for explanations of these anomalies. One of the key motivating issues behind this thesis is to determine whether professional ('local') traders exhibit psychological biases in their trading behaviour in the context of a real financial market setting. This research uses real-world trading data and includes every trade in share price index (SPI) futures contract placed by a local trader at the Sydney Futures Exchange (SFE) over the sample period 24 July, 1997 - 4 October, 1999. This approach is applied in three separate papers. 'The House Money Effect and Local Traders at the Sydney Futures Exchange', analyses whether professional traders behave in a manner that is consistent with the house money effect or other behavioural phenomenon, in particular loss aversion. Existing work suggests that professional traders exhibit psychological inconsistencies in their trading behaviour (Coval and Shumway, 2005; Locke and Mann, 2004, 2005; Frino et al., 2004). This paper models afternoon risk on morning profit and morning losses, respectively. The results provide strong evidence of the house money effect. In particular, morning profits encourage local traders to increase their risk-taking attitudes in afternoon trading sessions. 'Trading Horizons and Behavioural Biases: Does Time Matter?', analyses whether locals exhibit behaviour biases, such as the house money effect or loss aversion, over various trading horizons. Results reported in previous studies are mixed. Coval and Shumway (2005) find no evidence of abnormal trading behaviour across days, amongst proprietary traders at the Chicago Board of Trade (CBOT), while and Locke and Mann (2004) provide substantial evidence of loss aversion across days, amongst floor traders at the Chicago Mercantile Exchange (CME). Results from this research report strong evidence of the house money effect. However, this bias is only evident when locals evaluate their performance at high-frequency time intervals within intraday-trading cycles. 'Professional Futures Traders, Profits and Prices' analyses whether the behavioural biases of local traders affect prices. Work in this particular area is limited. Coval and Shumway (2005) report that proprietary traders at the Chicago Board of Trade (CBOT) behave in a manner that is consistent with loss aversion. Moreover, their results show that this behaviour impacts on short-term prices but has no longer-term impact. This research documents a similar finding, however, morning profits encourage local traders to buy contracts at higher prices and sell contracts at lower prices in the afternoon. This behaviour can be used to explain short-term afternoon price movements of one, two and three units, respectively. Results show that prices revert to earlier levels in the five-minute period following a price-setting trade, negating any permanent price impact.

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Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.