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Measuring the disposition effect

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  • De Winne, Rudy

Abstract

Despite hundreds of papers confirming the existence of the disposition effect, too little attention has been devoted to the prevailing arguments on the choice of a given method to measure it. This paper fills this gap and compares different measurement approaches. First, based on empirical and simulation-based data, I show how results may differ across measures depending on market trends but, more importantly, on the frequency at which investors make their decisions. Second, the pitfalls in analyzing cross-sectional differences in the disposition effect are illustrated and discussed. Finally, I clearly show that hazard models are quite appropriate to measuring the disposition effect of any investor, be it a day trader or a typical retail investor who monitors his portfolio infrequently.

Suggested Citation

  • De Winne, Rudy, 2021. "Measuring the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    • Handle: RePEc:eee:beexfi:v:29:y:2021:i:c:s2214635021000125
    DOI: 10.1016/j.jbef.2021.100468
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    References listed on IDEAS

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    3. Chen, Chen & Lu, Xiaomeng & Zhang, Yixing, 2023. "Is attention-based stock buying profitable? Empirical evidence from Chinese individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    4. Basha, Shabeen Afsar & Bennasr, Hamdi & Goaied, Mohamed, 2023. "Financial literacy, financial development, and leverage of small firms," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Disposition effect; Individual investors; Behavioral finance; Financial literacy; Trading activity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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