The Portfolio-Driven Disposition Effect

Abstract

The disposition effect for a stock significantly weakens if the portfolio is at a gain, but is large when it is at a loss. We find this portfolio-driven disposition effect (PDDE) in four independent settings: US and Chinese archival data, as well as US and Chinese experiments. The PDDE is robust to a variety of controls in regression specifications and is not explained by extreme returns, portfolio rebalancing, tax considerations, or investor heterogeneity. Our evidence suggests investors form mental frames at the stock and portfolio level and these frames combine to generate the PDDE.

Keywords: Disposition Effect, Realization Utility

JEL Classification: G11, G12, G40