Working Paper: NBER ID: w29821
Authors: Min Dai; Cong Qin; Neng Wang
Abstract: An investor receives utility bursts from realizing gains and losses at the individual-stock level (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013) and dynamically allocates his mental budget between risky and risk-free assets at the trading-account level. Using savings, he reduces his stockholdings and is more willing to realize losses. Using leverage, he increases his stockholdings beyond his mental budget and is more reluctant to realize losses. While leverage strengthens the disposition effect, introducing leverage constraints mitigates it. Our model predicts that investors with stocks in deep losses sell them either immediately or after stocks rebound a little.
Keywords: realization utility; portfolio rebalancing; behavioral finance
JEL Codes: D03; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| savings behavior (D14) | propensity to realize gains and losses (G41) |
| leveraging behavior (G41) | propensity to realize gains and losses (G41) |
| optimal gain/loss realization strategies (L21) | portfolio policy (G11) |
| size of loss (G33) | propensity to realize losses (G41) |