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Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias

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  • Goetzmann, William
  • Massa, Massimo

Abstract

We test the market impact of the disposition effect. We rely on the Grinblatt and Han (2002) model and derive testable implications about the expected relationship between the preponderance of disposition investors in the market and stock volatility, return and trading volume. We use a large sample of individual accounts over a six-year period to construct a variable that acts as proxy for the representation in the market of disposition investors. We show that, at a daily frequency, when the fraction of ‘irrational’ investor trades in a stock increases, stock volatility, return and trading volume decrease. We further show that such a stock-specific disposition acts as proxy to aggregates at the market level, generating a common factor. Statistical exposure to such a disposition-related factor explains cross-sectional differences in daily returns, after controlling for a host of other factors and characteristics.

Suggested Citation

  • Goetzmann, William & Massa, Massimo, 2004. "Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias," CEPR Discussion Papers 4814, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4814
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    Cited by:

    1. Petri Kyröläinen, 2008. "Day trading and stock price volatility," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(1), pages 75-89, January.
    2. Margaria Abreu, 2017. "HOW Biased is the Behavior of the Individual Investor in Warrants?," Working Papers Department of Economics 2017/18, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Andrey Kudryavtsev & Gil Cohen & Shlomit Hon-Snir, 2013. "“Rational” or “Intuitive”: Are Behavioral Biases Correlated Across Stock Market Investors?," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(2), June.
    4. Grinblatt, Mark & Han, Bing, 2005. "Prospect theory, mental accounting, and momentum," Journal of Financial Economics, Elsevier, vol. 78(2), pages 311-339, November.
    5. Bing NMI1 Han & Mark Grinblatt, 2001. "The Disposition Effect and Momentum," Yale School of Management Working Papers ysm239, Yale School of Management.
    6. Weber, Martin & Welfens, Frank, 2007. "How do Markets React to Fundamental Shocks? An Experimental Analysis on Underreaction and Momentum," Sonderforschungsbereich 504 Publications 07-42, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    7. Hirshleifer, David & Jiang, Danling, 2007. "Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns," MPRA Paper 16134, University Library of Munich, Germany, revised 08 Jul 2009.
    8. Margarida Abreu, 2017. "How Biased is the Behavior of the Individual Investor in Warrants?," Working Papers REM 2017/07, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Douglas W. Blackburn & William N. Goetzmann & Andrey D. Ukhov, 2014. "Is trading behavior stable across contexts? Evidence from style and multi-style investors," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 605-627, April.

    More about this item

    Keywords

    asset prices; disposition effect; volatility;

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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