Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias

38 Pages Posted: 25 Feb 2003  

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2003

Abstract

In this paper, we estimate the behavioral component of the Grinblatt and Han (2002) model and derive several testable implications about the expected relationship between the preponderance of disposition - prone investors in a market and volume, volatility and stock returns. To do this, we use a large sample of individual accounts over a six-year period in the 1990's in order to identify investors who are subject to the disposition effect. We then use their trading behavior to construct behavioral factors. We show that when the fraction of "irrational" investor purchases in a stock increases, the unexplained portion of the market price of the stock decreases. We further show that statistical exposure to a disposition factor explains cross-sectional differences in daily returns, controlling for a host of other factors and characteristics. The evidence is consistent with the hypothesis that trade between disposition-prone investors and their counter-parties impact relative prices.

Suggested Citation

Massa, Massimo and Goetzmann, William N., Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias (January 2003). Yale ICF Working Paper No. 03-01. Available at SSRN: https://ssrn.com/abstract=377043

Massimo Massa

INSEAD - Finance ( email )

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