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

Listed author(s):
  • Massimo Massa


    (Finance, INSEAD)

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    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.

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    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm31.

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    Date of creation: 25 Feb 2003
    Handle: RePEc:ysm:somwrk:ysm31
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