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

William Goetzmann and Massimo Massa
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Massimo Massa: 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 derive several 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 of individual accounts over a six-year period in the 1990`s in order to identify investors who are subject to the disposition effect. We then use their trading behavior to construct behavioral factors. We show that when the fraction of "irrational" investor purchases in a stock increases, the unexplained portion of the market price of the stock decreases. We further show that statistical exposure to a disposition factor explains cross-sectional differences in daily returns, controlling for a host of other factors and characteristics. The evidence is consistent with the hypothesis that trade between disposition-prone investors and their counter-parties impact relative prices.

Date: 2004-07-28
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Related works:
Working Paper: Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias (2005)
Working Paper: Disposition Matters: Volume, Volatility and Price Impact of Behavioral Bias (2005)
Working Paper: Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias (2004)
Working Paper: Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias (2003)
Working Paper: Disposition Matters: Volume, Volatility and PriceImpact of a Behavioral Bias (2003)
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