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A Rational Theory for Disposition Effects

Author

Listed:
  • Min Dai

    (National University of Singapore)

  • Yipeng Jiang

    (National University of Singapore)

  • Hong Liu

    (Washington University)

  • Jing Xu

    (Renmin University)

Abstract

Extant theories on the disposition effect are largely silent on most of the disposition-effect related trading patterns, including the V-shaped probabilities of buying and selling against unrealized profit. On the other hand, portfolio rebalancing and learning have been shown to be important, even for retail investors. We show that rational rebalancing with transaction costs and unknown expected returns can generate many disposition-effect-related trading patterns, including the V-shape results. Our paper complements the extant theories by suggesting that portfolio rebalancing may also constitute a significant driving force behind the disposition effect and the related patterns. (Copyright: Elsevier)

Suggested Citation

  • Min Dai & Yipeng Jiang & Hong Liu & Jing Xu, 2023. "A Rational Theory for Disposition Effects," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 131-157, January.
    • Handle: RePEc:red:issued:20-172
    DOI: 10.1016/j.red.2021.11.003
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    More about this item

    Keywords

    Disposition effect; Portfolio rebalancing; Learning; Transaction costs;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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