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The Disposition Effect and Momentum

Author

Listed:
  • Bing NMI1 Han

    (Department of Finance)

  • Mark Grinblatt

    (Finance Area)

Abstract

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 one-year returns have no predictability for the cross-section of returns once this variable is controlled for.

Suggested Citation

  • Bing NMI1 Han & Mark Grinblatt, 2001. "The Disposition Effect and Momentum," Yale School of Management Working Papers ysm239, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm239
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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