Change of the disposition effect and investor sentiment

We identify a novel anomaly in the Chinese stock market: stocks exhibit higher expected returns when the disposition effect becomes more asymmetric. This phenomenon cannot be explained by commonly used asset pricing factors. To investigate this, we construct a new factor, denoted as $$\Delta \text{Disposition Effect}$$ Δ Disposition Effect , to quantify the change in the disposition effect. Using transaction and financial data from Chinese listed companies between 2003 and 2021, we examine the informational content of the $$\Delta \text{Disposition Effect}$$ Δ Disposition Effect and its ability to explain expected excess returns on stocks. Our findings reveal that the new factor captures investor sentiment and demonstrates significant explanatory power for cross-sectional stock returns.