Emerald Management Review:
Disposition matters: volume, volatility, and price impact of a behavioural bias

Abstract:

Purpose - To link individual investor actions (loss aversion) directly to asset price movements. Design/approach/methodology - Samples 100,000 investor accounts (from approximately 80,000 households) from a national discount broker, and takes each position file at the end of each month from January 1991 to November 1996. Analyses each buy/sell decision, separating decisions on buy or sell on loss, and buy or sell on gain, against quantities sold or bought. Carefully creates a disposition proxy to describe investor disposition-motivated (loss-aversion) sales. Runs alternative proxies and disposition effects, and regresses, with different econometric specifications. Adds Fama and MacBeth regressions between disposition factors and stock and portfolio returns, for three and five days leads and lags.

Findings - Finds that 'the degree of liquidity of each stock is negatively related to the fraction of disposition investors who trade it'. Argues that higher liquidity does not explain lower returns. Shows that there is a negative correlation between the disposition effect and trading volume, volatility and stock returns.

Research limitations/implications - Implies that this first attempt to use real evidence of behavioural bias needs to be confirmed by other studies.

Originality/value - Presents an important advance in the analysis of investor behaviour.

Keywords:

Article Type:

Research paper

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