Measuring the Disposition Effect

44 Pages Posted: 8 Feb 2020 Last revised: 5 Jan 2021

Date Written: January 6, 2020

Abstract

Despite hundreds of papers confirming the existence of the disposition effect, too little attention has been devoted to the prevailing arguments on the choice of a given method to measure it. This paper fills this gap and compares different measurement approaches. First, based on empirical and simulation-based data, I show how results may differ across measures depending on market trends but, more importantly, on the frequency at which investors make their decisions. Second, the pitfalls in analyzing cross-sectional differences in the disposition effect are illustrated and discussed. Finally, I clearly show that hazard models are quite appropriate for measuring the disposition effect of any investor, be it a day trader or a typical retail investor who monitors his portfolio infrequently.

Keywords: Disposition effect, Individual investors, Behavioral finance

JEL Classification: G11, G40

Suggested Citation

De Winne, Rudy, Measuring the Disposition Effect (January 6, 2020). Available at SSRN: https://ssrn.com/abstract=3519938 or http://dx.doi.org/10.2139/ssrn.3519938

Rudy De Winne (Contact Author)

UCLouvain - Louvain Finance ( email )

Belgium
+3265323334 (Phone)

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