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Dynamic Trading with Realization Utility


  • Min Dai
  • Cong Qin
  • Neng Wang


An investor receives utility bursts from realizing gains and losses at the individual-stock level (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013) and dynamically allocates his mental budget between risky and risk-free assets at the trading-account level. Using savings, he reduces his stockholdings and is more willing to realize losses. Using leverage, he increases his stockholdings beyond his mental budget and is more reluctant to realize losses. While leverage strengthens the disposition effect, introducing leverage constraints mitigates it. Our model predicts that investors with stocks in deep losses sell them either immediately or after stocks rebound a little.

Suggested Citation

  • Min Dai & Cong Qin & Neng Wang, 2022. "Dynamic Trading with Realization Utility," NBER Working Papers 29821, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:29821
    Note: AP CF

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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