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The Disposition Effect and Momentum

  • Grinblatt, Mark

    (University of California, Los Angeles)

  • Han, Bing

    (Ohio State U)

The tendency of some investors to hold on to their losing stocks creates a spread between a stock's fundamental value and its equilibrium price, as well as price underreaction to information. Spread convergence, arising from the random evolution of fundamental values and updating of reference prices, generates predictable equilibrium prices that will be interpreted as possessing momentum. Cross-sectional empirical tests are consistent with the model. A variable proxying for aggregate unrealized capital gains appears to be the key variable that generates the profitability of a momentum strategy. Past returns have no predictability for the cross-section of returns once this variable is controlled for.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-3.pdf
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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-3.

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Date of creation: Dec 2003
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Handle: RePEc:ecl:ohidic:2004-3
Contact details of provider: Phone: (614) 292-8449
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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