How Prior Realized Outcomes Affect Portfolio Decisions

36 Pages Posted: 22 Feb 2013 Last revised: 25 Feb 2013

See all articles by Darren Duxbury

Darren Duxbury

Newcastle University Business School

Robert Hudson

Hull University Business School (HUBS)

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Zhishu Yang

Tsinghua University - School of Economics & Management

Songyao Yao

Independent

Date Written: February 20, 2013

Abstract

Investors have been shown to have particular preferences when it comes to the characteristics of stock they hold in their portfolios, while prior gains and losses have been shown to impact on individuals’ economic decisions, both in an investment context and more widely. This paper is the first to investigate how prior gains and losses affect investors’ preferences for particular stock characteristics and so shape their portfolio compositions. Using a rich dataset combination from China, we conclude that prior realized outcomes play an important role in shaping portfolio composition through their impact on the characteristics of stocks that investors choose to hold. We find that positive prior realized outcomes encourage investors to select stocks with a variety of characteristics broadly consistent with higher risk taking (for example, higher betas and higher levels of idiosyncratic risk), though there are some differences across investor classes. While our empirical results are in line with what one would expect from the existing literature on the disposition and house money effects, we also consider other possible interpretations of the results.

Keywords: prior realized outcomes, stock characteristics, portfolio composition

JEL Classification: G10, G11

Suggested Citation

Duxbury, Darren and Hudson, Robert and Keasey, Kevin and Yang, Zhishu and Yao, Songyao, How Prior Realized Outcomes Affect Portfolio Decisions (February 20, 2013). Review of Quantitative Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2221210

Darren Duxbury (Contact Author)

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom
+44(0)191 208 1517 (Phone)

HOME PAGE: http://www.ncl.ac.uk/nubs/staff/profile/darren.duxbury

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Zhishu Yang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62771769 (Phone)
+86-10-62785562 (Fax)

Songyao Yao

Independent ( email )

No Address Available
United States

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