Robust dynamic trading with realization utility

Jinping Zhang, Lei Zhou and Zhentao Zou

Economics Letters, 2024, vol. 244, issue C

Abstract: We incorporate model uncertainty into the intertemporal realized utility model proposed by Ingersoll and Jin (2013). We find: (1) model uncertainty erodes the investor’s value and makes him more willing to take the risk; (2) when ambiguity aversion is sufficiently high, voluntary realization of losses will not occur; (3) model uncertainty accelerates sales, thus shortening the average holding period and strengthening the disposition effect; (4) the disposition effect is weaker in the lower volatility case under model uncertainty, which is consistent with the empirical results; (5) model uncertainty alters the effect of volatility on the sale decision.

Keywords: Model uncertainty; Realization utility; Prospect theory; Disposition effect (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004440

DOI: 10.1016/j.econlet.2024.111960

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