Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias

Massimo Massa ()
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Massimo Massa: Finance, INSEAD

Yale School of Management Working Papers from Yale School of Management

Abstract: In this paper, we estimate the behavioral component of the Grinblatt and Han (2002) model and deriveseveral testable implications about the expected relationship between the preponderance of disposition-prone investors in a market and volume, volatility and stock returns. To do this, we use a large sample ofindividual accounts over a six-year period in the 1990`s in order to identify investors who are subject to thedisposition effect. We then use their trading behavior to construct behavioral factors. We show that whenthe fraction of "irrational" investor purchases in a stock increases, the unexplained portion of the marketprice of the stock decreases. We further show that statistical exposure to a disposition factor explainscross-sectional differences in daily returns, controlling for a host of other factors and characteristics. Theevidence is consistent with the hypothesis that trade between disposition-prone investors and theircounter-parties impact relative prices.

JEL-codes: D1 G1 (search for similar items in EconPapers)
Date: 2003-02-25
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mic
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm31

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