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

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Author Info
William N. Goetzmann () (International Center for Finance)
Massimo Massa (INSEAD)

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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 impact relative prices.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm331.

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Date of creation: 28 Jul 2004
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Handle: RePEc:ysm:somwrk:ysm331

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research. [Downloadable!]
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  2. 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. [Downloadable!] (restricted)
  3. Shlomo Benartzi & Richard H. Thaler, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March. [Downloadable!] (restricted)
  4. Ning Zhu & Ravi Dhar, 2002. "Up Close and Personal: An Individual Level Analysis of the Disposition Effect," Yale School of Management Working Papers ysm269, Yale School of Management. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(2), pages 575-606, March.
  8. Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(2), pages 455-488, March.
  9. William N. Goetzmann & Massimo Massa, 1999. "Index Funds and Stock Market Growth," NBER Working Papers 7033, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm17, Yale School of Management. [Downloadable!]
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  1. Petri Kyröläinen, 2008. "Day trading and stock price volatility," Journal of Economics and Finance, Springer, vol. 32(1), pages 75-89, January. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. 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. [Downloadable!]
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  4. 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. [Downloadable!]
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