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A Rational Theory for Disposition Effects

Min Dai, Yipeng Jiang, Hong Liu and Jing Xu ()
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Yipeng Jiang: National University of Singapore

Review of Economic Dynamics, 2023, vol. 47, 131-157

Abstract: Extant theories on the disposition effect are largely silent on most of the disposition-effect related trading patterns, including the V-shaped probabilities of buying and selling against unrealized profit. On the other hand, portfolio rebalancing and learning have been shown to be important, even for retail investors. We show that rational rebalancing with transaction costs and unknown expected returns can generate many disposition-effect-related trading patterns, including the V-shape results. Our paper complements the extant theories by suggesting that portfolio rebalancing may also constitute a significant driving force behind the disposition effect and the related patterns. (Copyright: Elsevier)

Keywords: Disposition effect; Portfolio rebalancing; Learning; Transaction costs (search for similar items in EconPapers)
JEL-codes: D91 G11 H24 K34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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https://dx.doi.org/10.1016/j.red.2021.11.003
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DOI: 10.1016/j.red.2021.11.003

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