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Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias


  • Massimo Massa

    () (Finance, INSEAD)


In this paper, we estimate the behavioral component of the Grinblatt and Han (2002) model and deriveseveral testable implications about the expected relationship between the preponderance of disposition-prone investors in a market and volume, volatility and stock returns. To do this, we use a large sample ofindividual accounts over a six-year period in the 1990`s in order to identify investors who are subject to thedisposition effect. We then use their trading behavior to construct behavioral factors. We show that whenthe fraction of "irrational" investor purchases in a stock increases, the unexplained portion of the marketprice of the stock decreases. We further show that statistical exposure to a disposition factor explainscross-sectional differences in daily returns, controlling for a host of other factors and characteristics. Theevidence is consistent with the hypothesis that trade between disposition-prone investors and theircounter-parties impact relative prices.

Suggested Citation

  • Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," Yale School of Management Working Papers ysm31, Yale School of Management.
  • Handle: RePEc:ysm:somwrk:ysm31

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    Cited by:

    1. Margaria Abreu, 2017. "HOW Biased is the Behavior of the Individual Investor in Warrants?," Working Papers Department of Economics 2017/18, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    2. Andrey Kudryavtsev & Gil Cohen & Shlomit Hon-Snir, 2013. "“Rational” or “Intuitive”: Are Behavioral Biases Correlated Across Stock Market Investors?," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(2), June.
    3. Bing NMI1 Han & Mark Grinblatt, 2001. "The Disposition Effect and Momentum," Yale School of Management Working Papers ysm239, Yale School of Management.
    4. Margarida Abreu, 2017. "How Biased is the Behavior of the Individual Investor in Warrants?," Working Papers REM 2017/07, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    5. Douglas W. Blackburn & William N. Goetzmann & Andrey D. Ukhov, 2014. "Is trading behavior stable across contexts? Evidence from style and multi-style investors," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 605-627, April.

    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G1 - Financial Economics - - General Financial Markets

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