The Effect of Prior Gains and Losses on Current Risk-Taking Using Quantile Regression

This paper investigates the dynamics of sequential decision-making in agricultural futures andoptions markets using a quantile regression framework. Analysis of trading records of 12 traderssuggests that there is great heterogeneity in individual trading behavior. Traders responddifferently to prior profits depending on how much risk their portfolios are carrying. In general,no significant response is found at average and below-average levels of risk, but response canbecome large and significant at above-average levels of risk. These results are consistent withstudies which argued that behavior may be uneven under different circumstances, and calls intoquestion the adoption of conditional mean framework to investigate trading behavior. Focusingthe analysis on the effect of prior profits on the conditional mean of the risk distribution can yieldmisleading results about dynamic behavior.