Asset Pricing When Traders Sell Extreme Winners and Losers

Review of Financial Studies, 2016, Vol. 29 (3): 823-861

PBCSF-NIFR Research Paper No. 13-05

51 Pages Posted: 17 Nov 2013 Last revised: 5 Sep 2018

See all articles by Li An

Li An

Tsinghua University - PBC School of Finance

Date Written: September 1, 2015


This study investigates the asset pricing implications of a newly documented refinement of the disposition effect, characterized by investors being more likely to sell a security when the magnitude of their gains or losses on it increases. I find that stocks with both large unrealized gains and large unrealized losses, aggregated across investors, outperform others in the following month (trading strategy monthly alpha = 0.5-1%, Sharpe ratio = 1.5). This supports the conjecture that these stocks experience higher selling pressure, leading to lower current prices and higher future returns. This effect cannot be explained by momentum, reversal, volatility, or other known return predictors, and it also subsumes the previously documented capital gains overhang effect. Moreover, my findings dispute the view that the disposition effect drives momentum; by isolating the loss effect from the gain effect, I find that the loss side has a return prediction opposite to momentum. Overall, this study provides new evidence that investors' tendencies can aggregate to affect equilibrium price dynamics; it also challenges the current understanding of the disposition effect and sheds light on the pattern, source, and pricing implications of this behavior.

Keywords: disposition effect, momentum strategy, trading behavior, cross-sectional return predictability

Suggested Citation

An, Li, Asset Pricing When Traders Sell Extreme Winners and Losers (September 1, 2015). Review of Financial Studies, 2016, Vol. 29 (3): 823-861, PBCSF-NIFR Research Paper No. 13-05, Available at SSRN: or

Li An (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083

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