The disposition effect in boom and bust markets

Sabine Bernard, Benjamin Loos and Martin Weber

No 305, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: The disposition effect is implicitly assumed to be constant over time. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals being 25% more likely to realize gains in bust than in boom periods. These changes in investors' selling behavior can be linked to changes in investors' risk aversion and in their beliefs across financial market cycles.

Keywords: Disposition Effect; Financial Market Cycles; Household Finance; Retail Investor (search for similar items in EconPapers)
JEL-codes: D14 G11 G28 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:305

DOI: 10.2139/ssrn.3779254

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