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DO shifts in regimes impact the disposition effect implied by prospect theory models?

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  • Haonan Lin
  • Xu Zheng

Abstract

We study how market regimes can influence investors’ behaviour under the framework of prospect theory. Two market regimes (bull and bear) are considered, which affect our investors’ reference points and their loss-averse behaviours. Using both theory and empirical evidence, the paper shows the disposition effect in a bull market is stronger than that in a bear market. Investors learn from both domains (gain and loss) in a bear market and more from the gain domain in a bull market. These results also provide an explanation for asymmetric learning regarding the disposition effect.

Suggested Citation

  • Haonan Lin & Xu Zheng, 2022. "DO shifts in regimes impact the disposition effect implied by prospect theory models?," Applied Economics Letters, Taylor & Francis Journals, vol. 29(13), pages 1168-1176, July.
  • Handle: RePEc:taf:apeclt:v:29:y:2022:i:13:p:1168-1176
    DOI: 10.1080/13504851.2021.1915947
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