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The Journal of Portfolio Management

The Journal of Portfolio Management

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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. ken.froot@fdopartners.com
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John Arabadjis
is vice president and head of Investor Behavior Research at State Street Associates in Cambridge, MA. jsarabadjis@statestreet.com
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Sonya Cates
is an assistant vice president in FX Investor Behavior Research at State Street Associates in Cambridge, MA. scates@statestreet.com
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Stephen Lawrence
is vice president and head of FX Investor Behavior Research at State Street Associates in Cambridge, MA. 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
    • ENDNOTE
    • REFERENCES
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Cited By...

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