The disposition effect in securities trading during the economic crisis; empirical evidence from the frontier market in Sri Lanka

This paper examines whether the disposition effect can be observed in the Sri Lankan Frontier Market before the economic crisis (2015-2018) and during the crisis (2019-2022). The study employs the disposition coefficient. The method considered the All Share Price Index (ASPI) closing index prices and respective share volumes, which were gathered daily from 1 January, 2015, to 31 December, 2022. Based on the disposition coefficient model, the results show that the disposition effect could not be observed before and during the economic crisis period. Furthermore, the researcher employs the Grinblatt and Han model. It uses a sample of 166 companies out of 290 listed on the Frontier Market in Sri Lanka. The findings of the Grinblatt and Han model reveal that stocks with a large negative capital gains overhang (CGO) exhibit a significant unrealised capital loss, meaning that the stock's market value is below the cost basis of its current shareholders (reference price). This indicates that investors are holding losing stocks and have not realised the losses and may be reluctant to sell them due to the disposition effect. Therefore, the disposition effect can be observed in the frontier market of Sri Lanka, both before and during economic crises. This study enables investors to make informed decisions, allowing them to allocate capital more efficiently, which in turn promotes economic expansion, enhances economic productivity, and fosters the potential for wealth generation. Therefore, the study may be helpful for different stakeholders.