Reverse Disposition Effect of Foreign Investors

Abstract

The paper analyses the tendency of investors to realize gains too early and the reluctance to liquidate losing positions. Analysis is based on the complete transaction data of the Estonian stock market. The Cox proportional hazard model along with ratio analysis is used to measure the disposition effect. I find presence of the disposition effect on the market but contrary to other investor groups, foreign investors seem to exhibit a "reverse disposition effect" that can be caused by different behavioral characteristics compared to local investors, especially risk aversion. Foreign investors are more driven by momentum strategies whereas local investors pursue the contrarian approach. Experience and investor sophistication seem to decrease the disposition effect.

Keywords: disposition effect, behavioral finance, foreign investors, risk aversion

JEL Classification: G11, G12