Stock volatility and trading |
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| Institution: | 1. Florida Atlantic University, College of Business, Finance, 777 Glades Road, Boca Raton, FL 33431, United States;2. Elon University, 100 Campus Drive, Elon, NC 27244, United States;1. IGPM, RWTH Aachen, 52056 Aachen, Germany;2. Karlsruhe Institute of Technology, Steinbuch Center for Computing, Hermann-von-Helmholtz-Platz 1, 76344 Eggenstein-Leopoldshafen, Germany;3. Im Hainzenthal 27, 67722 Winnweiler, Germany;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China;1. School of Mathematical Sciences, University of Jinan, China;2. SHU-UTS SILC Business School, Shanghai University, China;1. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 10048, Taiwan;2. College of Management, Yuan Ze University, Taoyuan 32003, Taiwan;3. Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30010, Taiwan;1. Chulalongkorn University, Sasin Graduate Institute of Business Administration, Bangkok, Thailand;2. Chulalongkorn University, College of Population Studies, Bangkok, Thailand;3. Pennsylvania State University, School of Graduate Professional Studies, Malvern, PA, USA |
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| Abstract: | Both, rational and behavioral models predict that stock and market volatility affect trading by investors. Tax-induced trading hypothesis predicts that investors increase realization of capital losses short term and capital gains only long term as volatility increases. Behavioral models predict that disposition biases of holding on to losers and disposing of winners intensifies with volatility. We document that market and stock volatility influence stock trading. Evidence on trading in response to rise in market volatility supports tax-loss harvesting hypothesis – abnormal trading of losers increases and winners decreases. However, evidence on trading patterns conditional on individual stock volatility is in support of both tax-loss-harvesting and behavioral models: trading in both losing stocks (tax-loss-harvesting hypothesis) and winning stocks (disposition effect hypothesis) increases with rise in stock volatility. |
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| Keywords: | Volatility Trading Tax-induced strategies Disposition effect |
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