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Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias

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  • William N. Goetzmann
  • Massimo Massa

Abstract

In this paper, we estimate the behavioral component of the Grinblatt and Han (2002) model and derive several testable implications about the expected relationship between the preponderance of disposition-prone investors in a market and volume, volatility and stock returns. To do this, we use a large sample of individual accounts over a six-year period in the 1990's in order to identify investors who are subject to the disposition effect. We then use their trading behavior to construct behavioral factors. We show that when the fraction of irrational' investor purchases in a stock increases, the unexplained portion of the market price of the stock decreases. We further show that statistical exposure to a disposition factor explains cross-sectional differences in daily returns, controlling for a host of other factors and characteristics. The evidence is consistent with the hypothesis that trade between disposition-prone investors and their counter-parties impacts relative prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9499.

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Date of creation: Feb 2003
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Publication status: published as Journal of Trading, vol. 3, no. 2 (2008): 68-90.
Handle: RePEc:nbr:nberwo:9499

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References

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  1. Campbell, John, 2000. "Asset Pricing at the Millennium," Scholarly Articles 3294737, Harvard University Department of Economics.
  2. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  3. Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Noriyoshi Shirishi & Masahiro Watanabe, 2003. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," NBER Working Papers 9470, National Bureau of Economic Research, Inc.
  4. Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 575-606, March.
  5. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  6. Ravi Dhar & Ning Zhu, 2002. "Up Close and Personal: An Individual Level Analysis of the Disposition Effect," Yale School of Management Working Papers ysm269, Yale School of Management, revised 01 Sep 2009.
  7. William N. Goetzmann & Massimo Massa, 2003. "Index Funds and Stock Market Growth," The Journal of Business, University of Chicago Press, vol. 76(1), pages 1-28, January.
  8. William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm17, Yale School of Management.
  9. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
  10. Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-," International Review of Finance, International Review of Finance Ltd., vol. 6(1-2), pages 43-78.
  11. Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 455-488, March.
  12. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
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Cited by:
  1. Hirshleifer, David & Jiang, Danling, 2007. "Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns," MPRA Paper 16134, University Library of Munich, Germany, revised 08 Jul 2009.
  2. Mark Grinblatt & Bing Han, 2001. "Prospect Theory, Mental Accounting, and Momentum," Yale School of Management Working Papers amz2533, Yale School of Management, revised 01 May 2007.
  3. Mark Grinblatt & Bing Han, 2002. "The Disposition Effect and Momentum," NBER Working Papers 8734, National Bureau of Economic Research, Inc.
  4. Andrey Kudryavtsev & Gil Cohen & Shlomit Hon-Snir, 2013. "“Rational” or “Intuitive”: Are Behavioral Biases Correlated Across Stock Market Investors?," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(2), June.
  5. Grinblatt, Mark & Han, Bing, 2005. "Prospect theory, mental accounting, and momentum," Journal of Financial Economics, Elsevier, vol. 78(2), pages 311-339, November.
  6. Petri Kyröläinen, 2008. "Day trading and stock price volatility," Journal of Economics and Finance, Springer, vol. 32(1), pages 75-89, January.
  7. Weber, Martin & Welfens, Frank, 2007. "How do Markets React to Fundamental Shocks? An Experimental Analysis on Underreaction and Momentum," Sonderforschungsbereich 504 Publications 07-42, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.

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