Trading Strategy for Stock Index Futures Based on Disposition Effect

Grinblatt and Han (2005) argued that unrealized capital gains and expected returns are positively related in the U.S. stock markets. This study investigates the possibility of developing investment strategies for stock index futures using the positive relation. Probing the trading data of futures on KOSPI200 during the period of 1995~2013, several interesting results are obtained. First, the strategy of building long positions when the unrealized capital gain is greater than zero produces positive profit which is statistically significant. Second, the profitability of this strategy during December is significantly positive while the profitability during January is insignificant. Third, the strategy generates positive profit during the second half year while the profitability of the first half year is insignificant. These results imply that it is possible to develop investment strategy by extracting some information from the unrealized capital gains.