Strategic trading against retail investors with disposition effects

Jouahn Nam, Jun Wang and Ge Zhang
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Jouahn Nam: Pace University
Jun Wang: Baruch College
Ge Zhang: University of New Orleans

No 2004-11, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: In this paper, we study a model incorporating the retail trader’s reluctance to sell into losses. We show that in this setup the informed trader always buys the asset when he receives a favorable signal. However, when the informed trader receives an unfavorable signal, he may not always sell the asset if the signal is moderately bad and the retail trader is reluctant to realize losses. Hence the good news travels faster than the bad news and the asset price exhibits steady climbs with sharp and sudden drops.

Keywords: Disposition effect; Retail investors; Strategic trading (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2004
New Economics Papers: this item is included in nep-fmk and nep-rmg
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