Rational Disposition Effects

61 Pages Posted: 16 Feb 2009 Last revised: 22 Sep 2012

See all articles by Daniel Dorn

Daniel Dorn

Drexel University - Department of Finance

Günter Strobl

University of Vienna - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2009

Abstract

The paper examines the tendency to sell winners and hold on to losers in a dynamic noisy rational expectations equilibrium with informed and uninformed investors. The key feature of the model is that the information asymmetry between investors varies over time. Besides demonstrating that the disposition effect is not intrinsically at odds with rational behavior, the model makes two novel predictions. First, disposition effects among uninformed investors should weaken after events that reduce information asymmetry. Second, disposition effects among uninformed investors should be weaker in persistent winners and persistent losers. The data, transactions of 30,000 clients at a German broker between 1995 and 2000, are consistent with these predictions.

Keywords: Disposition effect, Behavioral finance, Time-varying information asymmetry

JEL Classification: D82, D83, G14

Suggested Citation

Dorn, Daniel and Strobl, Günter, Rational Disposition Effects (February 14, 2009). Available at SSRN: https://ssrn.com/abstract=1343201 or http://dx.doi.org/10.2139/ssrn.1343201

Daniel Dorn

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Günter Strobl (Contact Author)

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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