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

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  • Massimo Massa

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    (Finance, INSEAD)

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    Abstract

    In this paper, we estimate the behavioral component of the Grinblatt and Han (2002) model and deriveseveral 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 ofindividual accounts over a six-year period in the 1990`s in order to identify investors who are subject to thedisposition effect. We then use their trading behavior to construct behavioral factors. We show that whenthe fraction of "irrational" investor purchases in a stock increases, the unexplained portion of the marketprice of the stock decreases. We further show that statistical exposure to a disposition factor explainscross-sectional differences in daily returns, controlling for a host of other factors and characteristics. Theevidence is consistent with the hypothesis that trade between disposition-prone investors and theircounter-parties impact relative prices.

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm31.

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    Date of creation: 25 Feb 2003
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    Handle: RePEc:ysm:somwrk:ysm31

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    Web page: http://icf.som.yale.edu/
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    Cited by:
    1. 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.
    2. 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.

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