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A Behavioral Explanation For The Asymmetric Volatility Effect


  • Mouna Abbes BOUJELBÈNE


In this study, we test whether the behavioural bias labelled “disposition effect†, defined as the tendency of investors to ride losses and realize gains, leading to asymmetric return-volatility relation before and during subprime crisis periods. The study of the cross-sectional relation between past cumulative return, current return and volatility shows that volatility is less sensible to return chocks when cumulative past return is positive. Using the capital gain measure of Grinblatt, and Han (2005), we examine the relation between capital gain, current return and volatility for American stocks during tranquil and turmoil periods. We find that negative capital gain of disposition investors explain a large part of asymmetric volatility mainly in subprime crisis period. Moreover, volatility is less sensitive to return shocks under positive capital gain before subprime crisis. Although, during subprime crisis period positive capital gain increases volatility of bigger stocks. This finding can be explained by the loss aversion bias which leads investors to take their positions because of increasing of failure risk during global financial crisis period.

Suggested Citation

  • Mouna Abbes BOUJELBÈNE, 2012. "A Behavioral Explanation For The Asymmetric Volatility Effect," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 6(6(18)/ Su), pages 121-131.
  • Handle: RePEc:ush:jaessh:v:7:y:2012:i:1(18)_summer2011:p:121

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    asymmetric volatility; disposition effect; behavioural finance; subprime crisis; capital gain;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F15 - International Economics - - Trade - - - Economic Integration


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