The disposition effect in boom and bust markets

Bernard, Sabine ; Loos, Benjamin ; Weber, Martin

Document Type: Conference presentation
Year of publication: 2020
Conference title: American Finance Association 2020 Annual Meeting
Location of the conference venue: San Diego, CA
Date of the conference: 03.-05.01.2020
Publication language: English
Institution: Business School > ABWL u. Bankbetriebslehre (Seniorprofessur) (Weber 2017-)
Subject: 330 Economics
Classification: JEL: D14, G11, G28,
Keywords (English): Household Finance, Disposition Effect, Macroeconomic Cycles
Abstract: The disposition effect is one of the most explored biases in behavioral finance, yet most papers investigating the disposition effect use data that only cover boom periods and assume that the disposition effect is constant over time. We use individual investor trading data that comprise several boom and bust periods (2001-2015) and show that the disposition effect is not constant over time. Instead, the disposition effect moves countercyclical with the market, i.e., is elevated in bust periods and reduced in boom periods. We find that this phenomenon is mainly driven by the amplified frequency of gain realizations in bust periods. Investors are, in relative terms, 25 percent more likely to realize winner assets in bust than in boom periods. Our study encourages further investigations into the effect of macroeconomic cycles on investors’ trading behavior.

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