Change of the disposition effect and investor sentiment

Pujian Yang () and Liu Yang ()
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Pujian Yang: Sejong University
Liu Yang: Sejong University

Journal of Asset Management, 2025, vol. 26, issue 5, No 3, 489-505

Abstract: Abstract We identify a novel anomaly in the Chinese stock market: stocks exhibit higher expected returns when the disposition effect becomes more asymmetric. This phenomenon cannot be explained by commonly used asset pricing factors. To investigate this, we construct a new factor, denoted as $$\Delta \text{Disposition Effect}$$ Δ Disposition Effect , to quantify the change in the disposition effect. Using transaction and financial data from Chinese listed companies between 2003 and 2021, we examine the informational content of the $$\Delta \text{Disposition Effect}$$ Δ Disposition Effect and its ability to explain expected excess returns on stocks. Our findings reveal that the new factor captures investor sentiment and demonstrates significant explanatory power for cross-sectional stock returns.

Keywords: Disposition effect; Investor sentiment; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41260-025-00412-4

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