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
Date Written: January 28, 2019
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: Suggested Citation