Working Paper: CEPR ID: DP4814
Authors: William Goetzmann; Massimo Massa
Abstract: We test the market impact of the disposition effect. We rely on the Grinblatt and Han (2002) model and derive testable implications about the expected relationship between the preponderance of disposition investors in the market and stock volatility, return and trading volume. We use a large sample of individual accounts over a six-year period to construct a variable that acts as proxy for the representation in the market of disposition investors. We show that, at a daily frequency, when the fraction of ?irrational? investor trades in a stock increases, stock volatility, return and trading volume decrease. We further show that such a stock-specific disposition acts as proxy to aggregates at the market level, generating a common factor. Statistical exposure to such a disposition-related factor explains cross-sectional differences in daily returns, after controlling for a host of other factors and characteristics.
Keywords: asset prices; disposition effect; volatility
JEL Codes: D10; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of disposition-prone investors (G41) | stock reactions to fundamental shocks (E32) |
| presence of disposition-prone investors (G41) | volatility (E32) |
| presence of disposition-prone investors (G41) | trading volume (G15) |
| increase in the representation of disposition investors (G11) | lower required rates of return (G19) |
| fraction of irrational investor trades in a stock (G41) | stock volatility (G17) |
| fraction of irrational investor trades in a stock (G41) | stock return (G12) |
| fraction of irrational investor trades in a stock (G41) | trading volume (G15) |