The Disposition Effect in Boom and Bust Markets
62 Pages Posted: 3 Nov 2018 Last revised: 27 Aug 2021
Date Written: October 12, 2018
Studies investigating the disposition effect are based on data sets which mostly cover boom periods. However, the drivers of the disposition effect (preferences and beliefs of investors) are rather countercyclical. We use individual investor trading data from Germany covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, being higher in bust markets than in boom markets. Our findings are driven by individuals being 26% more likely to realize gains during busts than during booms. These changes in investors’ selling behavior can be linked to changes in their risk aversion and to their beliefs across financial market cycles.
Keywords: Disposition Effect, Financial Market Cycles, Household Finance, Retail Investor
JEL Classification: D14, G11, G28
Suggested Citation: Suggested Citation