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Some gains are riskier than others: Volatility changes and the disposition effect

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  • Vasudevan, Ellapulli V.

Abstract

I examine whether investors revise their beliefs about a stock's risk due to an increase in the stock's volatility. This revision makes loss-averse investors more willing to sell a riskier stock with a paper gain as the likelihood of having to sell it at a loss later increases. An analysis of a large Finnish dataset on the holdings and trades of individual investors yields empirical support for this prediction: a one standard deviation increase in volatility is associated with an 11% increase in the disposition effect. The effect primarily emerges from investors' increased propensity to sell stocks with small paper gains.

Suggested Citation

  • Vasudevan, Ellapulli V., 2023. "Some gains are riskier than others: Volatility changes and the disposition effect," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 68-81.
    • Handle: RePEc:eee:jeborg:v:214:y:2023:i:c:p:68-81
    DOI: 10.1016/j.jebo.2023.07.034
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    More about this item

    Keywords

    Disposition effect; Volatility change; Belief revision; Loss probability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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