Some gains are riskier than others: Volatility changes and the disposition effect

Ellapulli V. Vasudevan

Journal of Economic Behavior & Organization, 2023, vol. 214, issue C, 68-81

Abstract: I examine whether investors revise their beliefs about a stock's risk due to an increase in the stock's volatility. This revision makes loss-averse investors more willing to sell a riskier stock with a paper gain as the likelihood of having to sell it at a loss later increases. An analysis of a large Finnish dataset on the holdings and trades of individual investors yields empirical support for this prediction: a one standard deviation increase in volatility is associated with an 11% increase in the disposition effect. The effect primarily emerges from investors' increased propensity to sell stocks with small paper gains.

Keywords: Disposition effect; Volatility change; Belief revision; Loss probability (search for similar items in EconPapers)
JEL-codes: G11 G41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:214:y:2023:i:c:p:68-81

DOI: 10.1016/j.jebo.2023.07.034

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