The Disposition Effect and Underreaction to News

This paper tests whether the “disposition effect,” that is the tendency of investors to ride losses and realize gains, induces “underreaction” to news, leading to return predictability. I use data on mutual fund holdings to construct a new measure of reference purchasing prices for individual stocks, and I show that post‐announcement price drift is most severe whenever capital gains and the news event have the same sign. The magnitude of the drift depends on the capital gains (losses) experienced by the stock holders on the event date. An event‐driven strategy based on this effect yields monthly alphas of over 200 basis points.     

The Dividend Disconnect

Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.     

Does Risk Seeking Drive Stock Prices? A Stochastic Dominance Analysis of Aggregate Investor Preferences and Beliefs

We use various stochastic dominance criteria that account for(local) risk seeking to analyze market portfolio efficiencyrelative to benchmark portfolios formed on market capitalization,book-to-market equity ratio and price momentum. Our resultssuggest that reverse S-shaped utility functions with risk aversionfor losses and risk seeking for gains can explain stock returns.The results are also consistent with a reverse S-shaped patternof subjective probability transformation. The low average yieldon big caps, growth stocks, and past losers may reflect investors’twin desire for downside protection in bear markets and upsidepotential in bull markets.     

Lottery stocks and stop-loss rules

We show that stop-loss rules increase the returns to investment in stocks with lottery features. These stocks typically have sporadic big gains and frequent small losses. However, stop-loss rules can reduce losses and allow investors to receive the gains from large price increases. We also highlight that sell signals of popular technical rules resemble stop-loss rules and are effective at increasing risk-adjusted returns for lottery stock. These rules could have helped investors avoid losses from major historical drawdowns, are particularly beneficial in declining markets, and are robust to the inclusion of transaction costs.     

中国个人投资者处置效应研究——一个非理性信念的视角

处置效应是指投资者过早卖出盈利股票而长期持有亏损股票的现象。大量文献表明金融市场投资者存在显著的处置效应,但其产生的原因和机理存在争议。本文在前景理论框架下,构建了包含投资者非理性预期的离散时间投资组合决策模型,发现处置效应随投资者情绪升高而减弱。本文使用我国某券商2007—2009年近177万个人投资者股票账户的交易数据进行了实证分析,得到与理论模型预测的一致结果,即投资者情绪与投资者处置效应之间呈现显著的负相关关系。而且,受情绪影响,投资者处置效应在估值难度较大的股票中更弱。本文结论对理解投资者处置效应、优化投资者卖出决策和加强资本市场基础制度建设具有一定理论和实践意义。     

The tax-loss selling hypothesis,market liquidity,and price pressure around the turn-of-the-year

In this paper, we use intra-day data for all stocks listed on the ISSM and provide new and direct evidence consistent with the tax-loss selling hypothesis. We find that (a) there is abnormal selling pressure prior to the year-end for stocks that have experienced large capital losses in the current and prior years (b) investors delay realizing capital gain by postponing the sale of capital gain stocks until after the new year (c) there is a significant decrease in the average trade size for stocks with large capital losses before the year-end and for stocks with capital gains in the new year, which suggests that individuals, rather than institutional investors, are the major sellers around the year-end (d) the tax-loss selling hypothesis, and not firm size or share price, is the fundamental explanation for abnormal January returns. Further, small or low share priced firms with capital gains do not experience abnormal returns in January. However, conditional on capital losses, small or low share priced firms magnify the turn-of-the-year effect (e) On average, the increase in selling activity adversely affects market liquidity by increasing bid-ask spreads and reducing depths. (f) The tax-loss selling pressure not only causes the price to be at the bid at the year-end, it also temporarily depresses the equilibrium price indicating the short run demand curve is not perfectly elastic (g) the year-end buying activity suggests that large investors buy capital loss stocks prior to the year-end to take advantage of the temporarily depressed price and capital gain stocks after the new year to reinvest the proceeds of the tax-loss selling.     

Realization utility

A number of authors have suggested that investors derive utility from realizing gains and losses on assets that they own. We present a model of this “realization utility,” analyze its predictions, and show that it can shed light on a number of puzzling facts. These include the disposition effect, the poor trading performance of individual investors, the higher volume of trade in rising markets, the effect of historical highs on the propensity to sell, the individual investor preference for volatile stocks, the low average return of volatile stocks, and the heavy trading associated with highly valued assets.     

Stock price synchronicities and speculative trading in emerging markets

The literature suggests that the strong price synchronicity observed in emerging markets is driven by the lack of firm-specific information acquisition. This paper extends previous studies by focusing on the question of whether investors’ speculative trading behavior or market conditions make the synchronicity in emerging markets more pronounced. Our results indicate that the propensity to engage in speculative trades and a low level of linkage with the world market lead to greater stock price synchronicity. These results are consistent with the hypotheses that it is difficult to price firm-level fundamentals in a speculative market where noise trades prevail, and that less weight is attached to firm-specific fundamentals in pricing stocks in a more segmented market. The price synchronicities are largely found to be stronger in bearish markets, a finding consistent with the hypothesis that investors have increased loss aversion during bear markets, which further limits informed arbitrage.     

Looking for Someone to Blame: Delegation,Cognitive Dissonance,and the Disposition Effect

We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse‐disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse‐disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

Stock market investors' use of stop losses and the disposition effect

The disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain. This bias is associated with poorer investment performance and exhibited to a greater extent by investors with less experience and less sophistication. A method of managing susceptibility to the bias is through use of stop losses. Using the trading records of UK stock market individual investors from 2006 to 2009, this paper shows that stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect. We also show that investors who use stop losses have less experience and that, when not using stop losses, these investors are more reluctant to realise losses than other investors.     

The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks

We empirically test whether the disposition effect has an asymmetrical impact on the price adjustment on the ex-dividend day of common stocks listed in NYSE and AMEX during the 2001–2008 period. We find that stocks with accrued gains have a greater ex-day price drop ratio (PDR) than stocks with accrued losses. We also find a positive relationship between the PDR and the capital gains overhang that has significant explanatory power over the cross-sectional variability of the PDR. Moreover, the capital gains overhang seems to explain part of the time variation of the PDR for a particular stock that can be a winner or loser at different times. We attribute our results to the disposition effect because active (limited) selling by holders of winning (losing) stocks will most likely accelerate (restrain) the downward price adjustment on the ex-dividend day.     

How loss averse are investors in financial markets?

We investigate loss aversion in financial markets using a typical asset allocation problem. Our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature. Moreover, loss aversion changes depending on market conditions; investors become far more loss averse during bull markets than during bear markets, indicating their more profound disutility for losses when others enjoy gains. Contrary to most previous results, we find that investors are more sensitive to changes in losses than changes in gains.     

Is the disposition effect in bonds as strong as in stocks? Evidence from an emerging market

Does the disposition effect appear in bond trades as in stocks? We apply Odean's measurement (1998) to a proprietary transaction database with unique investor IDs from an emerging market exchange that holds both stock and bond trading. We find some disposition effect in treasury bonds, but much lower than in stocks, and a positive relation between the two measures by investor. In addition, we find a significant disposition effect for local individuals and family offices, in both markets. In contrast, long-term institutions, brokerage firms, and foreign investors do not exhibit this bias. This is the first study to report evidence of the disposition effect in a fixed-income market.     

Price Comovement and Institutional Performance Following Large Market Movements

This paper investigates the price comovement of stocks actively traded by institutions and the investment performance of foreign and domestic institutional investors in Taiwan's stock markets during periods of large market movements. Stocks of small size, high share turnover, and high return volatility tend to move together with the market when markets rise sharply. In short-term holdings, foreign investors and domestic mutual funds can outperform the market by trading small-size, high-turnover, and high-volatility stocks.     

IPO限价发行与新股二级市场价格泡沫——论股票市场“弹簧效应”

本文通过对比2009年7月1日至2014年6月30日IPO市场化定价发行阶段与2014年7月1日至2018年6月30日IPO限价发行阶段共1950个IPO样本,发现IPO限价发行对于新股在二级市场股价表现具有“弹簧效应”:即抑制股票一级市场发行价格会造成新股在二级市场价格短期内超涨,限价发行新股的二级市场定价显著高于市场化定价发行新股的二级市场定价。限价发行引起的过高二级市场定价最终导致股票长期回报率低下。另外,创业板公司“弹簧效应”显著强于主板公司。这些实证结果都可以被本文提出的一级市场价格压抑造成二级市场非理性投资者上涨预期一致、盲目追涨的理论模型所解释。本文的研究指出抑制股票一级市场定价虽然形式上可以解决新股发行价过高问题,但是却造成二级市场更大的价格扭曲。这一发现为进一步完善我国IPO发行定价机制提供了依据。     

DO DIVIDEND FLOWS AFFECT STOCK RETURNS?

We examine price impacts from dividend flows. Event‐study estimates show that stocks experience abnormal returns on the dividend distribution day. Results also show a spillover effect to non‐dividend‐paying stocks that are likely to be part of the same benchmark portfolio as the dividend‐paying stocks. Regression results indicate that the effect is dependent on the ownership share by professional investors. The temporary nature of the effect on returns is in line with the literature's demand‐driven price pressure hypothesis.     

Opening price manipulation and its value influences

We investigate how opening price manipulation influences market behaviors and investors' returns. Analyzing direct evidence comprising 87 opening price manipulation cases, and indirect evidence consisting of 19,003 suspected cases detected by an opening price manipulation identification model that we construct, we examine the impact of manipulation on mispricing, investors' welfare, trading activity and price volatility. Our results indicate that manipulated stocks experience significantly lower returns and a higher probability of price reversal after manipulation. Investors who purchase manipulated stocks at their opening price, or the volume-weighted average price, on the manipulation day make losses on their investments. Further, manipulation increases market trading activity and price volatility due to the influx of retail investors. Our additional analysis demonstrates that enhancing the intensity of external supervision and internal governance can mitigate mispricing caused by opening price manipulation. Our study provides novel evidence of the economic consequences of open market manipulation and policy implications for governments and regulators to develop effective supervisory processes to reduce manipulation and mitigate its impact on efficient markets.     

Reference point formation by market investors

The disposition effect [Shefrin, H., Statman M., 1985, The disposition to sell winners too early and ride losers too long. Journal of Finance, 40, 777–790], investors’ tendency to sell gaining assets and hold on to loosing assets, relies on the notion of a reference point distinguishing between losses and gains. While literature using aggregated market data documented the existence of such a reference point affecting investors’ decisions, it had not pinpointed it. The main goal of our work is to shed light on the mechanism of reference point formation. We hypothesize that salient events taking place during a stock’s holding period influence investors’ perceptions and make them update the stock’s reference point. Using analysts’ earnings forecasts, stock price data, and firms’ quarterly earnings announcements, we document that company-specific events indeed affect the reference points. We discover that the earnings announcements played a role in reference point formation when they were not anticipated, i.e., when (i) analysts’ earnings forecasts failed to provide accurate predictions; and (ii) the earnings announcements were followed by market price reactions. Moreover, the reference points were affected more profoundly for low market capitalization, high beta firms, pointing that the reference point updating process is more reactive to events when information flow is low and prices are sensitive to market fluctuations. Our results also corroborate the attention hypothesis, i.e., the observation that agents facing numerous alternatives may consider primarily those that have caught their attention.     

The disposition effect and investor experience

We examine whether investing experience can dampen the disposition effect, that is, the fact that investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. To do so, we devise a computer program that simulates the stock market. We use the program in an experiment with two groups of subjects, namely experienced investors and undergraduate students (the inexperienced investors). As a control procedure, we consider random trade decisions made by robot subjects. We find that though both human subjects show the disposition effect, the more experienced investors are less affected.