Multiple Birds, One Stone: Can Portfolio Rebalancing Contribute to Disposition Effect-related Trading Patterns?

47 Pages Posted: 6 Apr 2015 Last revised: 30 Jan 2019

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Jing Xu

National University of Singapore (NUS)

Date Written: January 28, 2019

Abstract

Extant theories on the disposition effect are largely silent on most of the related trading patterns, including the V-shape results for probabilities of buying and selling against unrealized profit. On the other hand, portfolio rebalancing and learning have been shown to be important, even for retail investors. We show that if expected returns are unknown and transaction costs are nonzero, then portfolio rebalancing alone can predict the disposition effect and many of the related trading patterns, including the V-shape results. Our model also provides new empirically testable predictions related to the disposition effect.

Keywords: disposition effect, portfolio rebalancing, learning, transaction costs

JEL Classification: G11, H24, K34, D91

Suggested Citation

Dai, Min and Liu, Hong and Xu, Jing, Multiple Birds, One Stone: Can Portfolio Rebalancing Contribute to Disposition Effect-related Trading Patterns? (January 28, 2019). Available at SSRN: https://ssrn.com/abstract=2589907 or http://dx.doi.org/10.2139/ssrn.2589907

Min Dai

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Hong Liu (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Jing Xu

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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