Determinants of Disposition and Reverse Disposition Effects

Abstract

We develop a new measure for disposition effects based on the average length of a trading strategy and whether it is loss-making or profitable. Using this new measure, we are able to evaluate disposition effects in more detail than has been possible previously. We find for the first time the existence of disposition and reverse disposition effects. The reverse disposition effects are particularly prominent during falling markets, which is consistent with the prediction of Barberis and Xiong's (2008) model. Finally, the behavioral bias reduces for more experienced traders, traders holding investments for a longer period, and traders using buy strategies.

Keywords: Behavioral bias, Disposition effect, Investor characteristics

JEL Classification: G12, G14