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Portfolio Management and Disposition Effect Empirical Evidence From Pakistan

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  • Muhammad Wajid, Raza

Abstract

Kahneman and Tversky’s approach to preference under uncertainty is aversion to loss realization. This paper is an attempt to highlight this phenomenon with a unique approach. In order to beat the market fund managers are required to manage their portfolio at regular intervals. The tendency to sell the winners too early and ride the losers for long “disposition effect” can affect the Management decision of fund managers. This paper investigates the mediating role of disposition effect between mental accounting, aversion to regret, self control and portfolio Management. For this purpose we use the extended version of Shefrin and Statman framework and include Dyl’s tax consideration and Fama and French style tilts as controlling variables. In order to provide empirical evidence survey has been conducted from mutual fund managers. CFA and Cronbach’s alpha is used to test the reliability of the instrument. AMOS is used to test the structure equation model for disposition effect and portfolio Management. Results confirmed that disposition effect plays significant role of mediator between mental accounting, aversion to regret, self control and portfolio Management. However tax consideration has direct loading on forward Management. It means that disposition effect plays significant role in decisions of fund managers, however investors are aware of tax consideration

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48371.

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Date of creation: 16 Jul 2013
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Handle: RePEc:pra:mprapa:48371

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Keywords: Disposition effect. Portfolio Management. Mental accounting. Aversion to regret. Self control;

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  1. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
  2. Branch, Ben, 1977. "A Tax Loss Trading Rule," The Journal of Business, University of Chicago Press, vol. 50(2), pages 198-207, April.
  3. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  4. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(2), pages 392-406, April.
  5. Dyl, Edward A, 1977. "Capital Gains Taxation and Year-End Stock Market Behavior," Journal of Finance, American Finance Association, vol. 32(1), pages 165-75, March.
  6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  7. Schlarbaum, Gary G & Lewellen, Wilbur G & Lease, Ronald C, 1978. "Realized Returns on Common Stock Investments: The Experience of Individual Investors," The Journal of Business, University of Chicago Press, vol. 51(2), pages 299-325, April.
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