Application of Structural Equation Modeling in Behavioral Finance: A Study on the Disposition Effect

Hsin-Hue Chang

Chapter 16 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 603-626 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Studies on behavioral finance argue that cognitive/emotional biases could influence investors’ decisions and result in the disposition effect, wherein investors have the tendency to sell winning stocks too early and hold losing stocks too long. In this regard, this study proposes a conceptual model to examine the relationship among cognitive/emotional biases, the disposition effect, and investment performance. Cognitive/emotional biases mainly consist of mental accounting, regret avoidance, and self-control. Furthermore, this study examines whether gender and marital status moderate the relationship between these biases and the disposition effect by collecting quantitative data through a questionnaire survey and employing a structural equation modeling (SEM) approach to execute the estimation procedure. The results of this study show that mental accounting has the most significant influence on the disposition effect, which implies that prospect theory is an alternative to expected utility theory in accounting for investor’s behavior. The findings of moderating analysis indicate that female investors display a larger disposition effect than male investors.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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