Strategic trading against retail investors with disposition effects
AbstractIn this paper, we study a model incorporating the retail trader’s reluctance to sell into losses. We show that in this setup the informed trader always buys the asset when he receives a favorable signal. However, when the informed trader receives an unfavorable signal, he may not always sell the asset if the signal is moderately bad and the retail trader is reluctant to realize losses. Hence the good news travels faster than the bad news and the asset price exhibits steady climbs with sharp and sudden drops.
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Bibliographic InfoPaper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2004-11.
Length: 24 pages
Date of creation: 2004
Date of revision:
Disposition effect; Retail investors; Strategic trading;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-03 (All new papers)
- NEP-FMK-2005-04-03 (Financial Markets)
- NEP-RMG-2005-04-03 (Risk Management)
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