Does the consciousness of the disposition effect increase the equity premium?
The disposition effect is a well established phenomenon in the empirical and experimental financial literature. It leads to sell winners too early and to hold losers too long. In this paper, we show that the consciousness of the disposition effect by investors lead them to require a greater risk premium to invest in stocks (when compared to rational investors). We also analyze the role of the evaluation period for disposition investors. We show that the risk premium they require is a decreasing function of the delay between two evaluations of their portfolio. The influence of the evaluation period on the equity premium looks like the one induced by myopic loss aversion (Benartzi-Thaler, 1995) but the origin is different. Valuing more often a portfolio give more occasions to sell winning stocks and then decreases the expected return. This point is analyzed by assuming that returns are driven by a Brownian motion and that investors evaluate their portfolio at regularly spaced dates.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: 61, Avenue de la Forêt Noire, F-67085 Strasbourg Cedex|
Phone: (33) 3 90 41 41 30
Fax: (33) 3 90 41 40 50
Web page: http://ifs.unistra.fr/large
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Genesove, David & Mayer, Christopher, 2001.
"Loss Aversion and Seller Behaviour: Evidence from the Housing Market,"
CEPR Discussion Papers
2813, C.E.P.R. Discussion Papers.
- David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
- David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
- Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
- Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-," International Review of Finance, International Review of Finance Ltd., vol. 6(1-2), pages 43-78.
- Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, 02.
- Nicholas Barberis & Wei Xiong, 2006.
"What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation,"
NBER Working Papers
12397, National Bureau of Economic Research, Inc.
- Nicholas Barberis & Wei Xiong, 2009. "What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation," Journal of Finance, American Finance Association, vol. 64(2), pages 751-784, 04.
- Groot, J.S. de & Dijkstra, T.K., 1996. "The equity premium puzzle and the resolution by 'myopic loss aversion' revisited," Research Report 96E27, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
- Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
- Mark Grinblatt, 2001.
"What Makes Investors Trade?,"
Journal of Finance,
American Finance Association, vol. 56(2), pages 589-616, 04.
- repec:dgr:rugsom:96e27 is not listed on IDEAS
- De Bondt, Werner F. M., 1998. "A portrait of the individual investor," European Economic Review, Elsevier, vol. 42(3-5), pages 831-844, May.
- Lakonishok, Josef & Smidt, Seymour, 1986. " Volume for Winners and Losers: Taxation and Other Motives for Stock Trading," Journal of Finance, American Finance Association, vol. 41(4), pages 951-74, September.
- Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
- Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
When requesting a correction, please mention this item's handle: RePEc:lar:wpaper:2007-01. 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: (Christophe J. Godlewski)
If references are entirely missing, you can add them using this form.