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The Disposition Effect and Momentum

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  • Bing NMI1 Han

    () (Department of Finance)

  • Mark Grinblatt

    () (Finance Area)

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 one-year returns have no predictability for the cross-section of returns once this variable is controlled for.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm239.

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Date of creation: 09 Nov 2001
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Handle: RePEc:ysm:somwrk:ysm239

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Web page: http://icf.som.yale.edu/
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Citations

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Cited by:
  1. Du, Ding, 2008. "The 52-week high and momentum investing in international stock indexes," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 61-77, February.
  2. Grinblatt, Mark & Moskowitz, Tobias J., 2004. "Predicting stock price movements from past returns: the role of consistency and tax-loss selling," Journal of Financial Economics, Elsevier, vol. 71(3), pages 541-579, March.
  3. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
  4. Glaser, Markus & Weber, Martin, 2002. "Momentum and Turnover: Evidence from the German Stock Market," CEPR Discussion Papers 3353, C.E.P.R. Discussion Papers.
  5. Seow Ong & Poh Neo & Yong Tu, 2008. "Foreclosure Sales: The Effects of Price Expectations, Volatility and Equity Losses," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 265-287, April.
  6. Newton, Da Costa Jr & Carlos, Mineto & Sergio, Da Silva, 2006. "Disposition effect and gender," MPRA Paper 1848, University Library of Munich, Germany.
  7. Kaustia, Markku, 2004. "Market-wide impact of the disposition effect: evidence from IPO trading volume," Journal of Financial Markets, Elsevier, vol. 7(2), pages 207-235, February.
  8. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
  9. Luis Muga & Rafael Santamaría, 2009. "Momentum, market states and investor behavior," Empirical Economics, Springer, vol. 37(1), pages 105-130, September.
  10. Wang, Daxue, 2008. "Are anomalies still anomalous? An examination of momentum strategies in four financial markets," IESE Research Papers D/775, IESE Business School.
  11. Mihir A. Desai & James R. Hines Jr., 2002. "Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions," NBER Working Papers 9057, National Bureau of Economic Research, Inc.

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