The Disposition Effect in Boom and Bust Markets

39 Pages Posted: 3 Nov 2018

See all articles by Sabine Bernard

Sabine Bernard

University of Mannheim - Department of Banking and Finance

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: October 12, 2018

Abstract

The disposition effect is one of the most explored biases in behavioral finance, yet most papers investigating the disposition effect use data that only cover boom periods and assume that the disposition effect is constant over time. We use individual investor trading data that comprise several boom and bust periods (2001-2015) and show that the disposition effect is not constant over time. Instead, the disposition effect moves countercyclical with the market, i.e., is elevated in bust periods and reduced in boom periods. We find that this phenomenon is mainly driven by the amplified frequency of gain realizations in bust periods. Investors are, in relative terms, 25 percent more likely to realize winner assets in bust than in boom periods. Our study encourages further investigations into the effect of macroeconomic cycles on investors’ trading behavior.

Keywords: Household Finance, Disposition Effect, Macroeconomic Cycles

JEL Classification: D14, G11, G28

Suggested Citation

Bernard, Sabine and Loos, Benjamin and Weber, Martin, The Disposition Effect in Boom and Bust Markets (October 12, 2018). Available at SSRN: https://ssrn.com/abstract=3265135 or http://dx.doi.org/10.2139/ssrn.3265135

Sabine Bernard (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

L9, 1-2
Room 208
Mannheim, DE 68131
Germany
00496211811531 (Phone)

HOME PAGE: http://www.bwl.uni-mannheim.de/weber/team/

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/digitalfinance/home/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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