Reference Price Formation for Packaged Transactions

13 Pages Posted: 29 Aug 2012

See all articles by Andrew R. Grant

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business; Financial Research Network (FIRN)

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: August 28, 2012

Abstract

This paper provides an in depth analysis of the reference price investors apply when they decide if a security is to be kept or sold. We propose that the observed reluctance to crystallize losses and propensity to realize gains, a behavioral bias dubbed the disposition effect, may be a result of the reference investors apply to determine if an investments is in profit or at loss. We examine a comprehensive data set comprised of all trading records for investors within the Nasdaq OMX Helsinki market over a recent seven year period. We find that the disposition effect is statistically and economically significant in the short run for a sample of active individual investors that purchase shares at one price in one package. It appears that there can be significant reduction in the extent of the disposition effect by simply reducing the significance of the purchase price by packaging buy transactions.

Suggested Citation

Grant, Andrew R. and Westerholm, P. Joakim, Reference Price Formation for Packaged Transactions (August 28, 2012). Available at SSRN: https://ssrn.com/abstract=2137435 or http://dx.doi.org/10.2139/ssrn.2137435

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
61-2-9036-7991 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

P. Joakim Westerholm (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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