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Strategic trading against retail investors with disposition effects

Author

Listed:
  • Nam, Jouahn

    (Pace University)

  • Wang, Jun

    (Baruch College)

  • Zhang, Ge

    (University of New Orleans)

Abstract

In this paper, we study a model incorporating the retail trader’s reluctance to sell into losses. We show that in this setup the informed trader always buys the asset when he receives a favorable signal. However, when the informed trader receives an unfavorable signal, he may not always sell the asset if the signal is moderately bad and the retail trader is reluctant to realize losses. Hence the good news travels faster than the bad news and the asset price exhibits steady climbs with sharp and sudden drops.

Suggested Citation

  • Nam, Jouahn & Wang, Jun & Zhang, Ge, 2004. "Strategic trading against retail investors with disposition effects," Working Papers 2004-11, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2004-11
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    More about this item

    Keywords

    Disposition effect; Retail investors; Strategic trading;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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