Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias

William Goetzmann () and Massimo Massa

No 4814, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We test the market impact of the disposition effect. We rely on the Grinblatt and Han (2002) model and derive testable implications about the expected relationship between the preponderance of disposition investors in the market and stock volatility, return and trading volume. We use a large sample of individual accounts over a six-year period to construct a variable that acts as proxy for the representation in the market of disposition investors. We show that, at a daily frequency, when the fraction of ‘irrational’ investor trades in a stock increases, stock volatility, return and trading volume decrease. We further show that such a stock-specific disposition acts as proxy to aggregates at the market level, generating a common factor. Statistical exposure to such a disposition-related factor explains cross-sectional differences in daily returns, after controlling for a host of other factors and characteristics.

Keywords: asset prices; disposition effect; volatility (search for similar items in EconPapers)
JEL-codes: D10 G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2004-12

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Working Paper: Disposition Matters: Volume, Volatility and Price Impact of Behavioral Bias (2005)
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