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The Disposition Effect and Momentum

Author

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  • Grinblatt, Mark

    (University of California, Los Angeles)

  • Han, Bing

    (Ohio State U)

Abstract

The tendency of some investors to hold on to their losing stocks creates a spread between a stock's fundamental value and its equilibrium price, as well as price underreaction to information. Spread convergence, arising from the random evolution of fundamental values and updating of reference prices, generates predictable equilibrium prices that will be interpreted as possessing momentum. Cross-sectional empirical tests are consistent with the model. A variable proxying for aggregate unrealized capital gains appears to be the key variable that generates the profitability of a momentum strategy. Past returns have no predictability for the cross-section of returns once this variable is controlled for.

Suggested Citation

  • Grinblatt, Mark & Han, Bing, 2003. "The Disposition Effect and Momentum," Working Paper Series 2004-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2004-3
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-3.pdf
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    • G1 - Financial Economics - - General Financial Markets

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