Portfolio Choice and Trading Volume with Loss-Averse Investors
We present a model of portfolio choice and stock trading volume with loss-averse investors. The demand function for risky assets is discontinuous and nonmonotonic: As wealth rises beyond a threshold, investors follow a generalized portfolio insurance strategy, which is consistent with the disposition effect. In addition, loss-averse investors hold no stocks unless the equity premium is quite high. The elasticity of the aggregate demand curve changes substantially, depending on the distribution of wealth across investors. In an equilibrium setting, the model generates positive correlation between trading volume and stock return volatility but suggests that this relationship is nonlinear.
When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:675-706. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.