Some Gains Are Riskier Than Others: Volatility Changes, Belief Revisions, and the Disposition Effect

44 Pages Posted: 7 May 2019 Last revised: 12 Dec 2022

See all articles by Ellapulli V. Vasudevan

Ellapulli V. Vasudevan

Indian Institute of Management (IIM), Ahmedabad

Date Written: October 22, 2022

Abstract

I examine whether investors revise their beliefs about a stock's risk due to an increase in the stock's volatility. This revision makes loss-averse investors more willing to sell a riskier stock with a paper gain as the likelihood of having to sell it at a loss later increases. An analysis of a large Finnish dataset on the holdings and trades of individual investors yields empirical support for this prediction: a one standard deviation increase in volatility is associated with an 11% increase in the disposition effect. The effect primarily emerges from investors' increased propensity to sell stocks with small paper gains.

Keywords: Disposition Effect; Probability of Losses; Volatility Change; Belief Revision

JEL Classification: G11, G41

Suggested Citation

Vasudevan, Ellapulli V., Some Gains Are Riskier Than Others: Volatility Changes, Belief Revisions, and the Disposition Effect (October 22, 2022). Available at SSRN: https://ssrn.com/abstract=3363580 or http://dx.doi.org/10.2139/ssrn.3363580

Ellapulli V. Vasudevan (Contact Author)

Indian Institute of Management (IIM), Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

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