The Portfolio-Driven Disposition Effect

Author: Li An, Joseph Engelberg, Matthew Henriksson, Baolian Wang, Jared Williams

In simple univariate tests, the disposition effect for a stock nearly disappears if the portfolio is at a gain. We find a large disposition effect when the portfolio is at a loss. The portfolio-driven disposition effect that we document is not explained by extreme returns, portfolio rebalancing, simultaneous transactions, or investor sophistication/skill. We consider hedonic mental accounting and preferences over both paper and realised gains/losses as potential explanations for our findings.

An, L. Engelberg, J. Henriksson, M. Wang, B. Williams, J. 2018, The Portfolio-Driven Disposition Effect

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