Individual Responses to Realized Gains and Losses

72 Pages Posted: 8 Jul 2021

See all articles by Steffen Meyer

Steffen Meyer

Aarhus University - Department of Finance; Danish Finance Institute

Michaela Pagel

Columbia University - Columbia Business School

Date Written: June 24, 2021

Abstract

We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; however, they reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months. It arises because many individuals forced to realize a loss choose not to reinvest anything, and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.

JEL Classification: G5, D90, G41, D14

Suggested Citation

Meyer, Steffen and Pagel, Michaela, Individual Responses to Realized Gains and Losses (June 24, 2021). Journal of Finance, Forthcoming, Columbia Business School Research Paper , Available at SSRN: https://ssrn.com/abstract=3875615

Steffen Meyer (Contact Author)

Aarhus University - Department of Finance ( email )

Fuglesangs Alle 4
DK-8210 Aarhus
Denmark

Danish Finance Institute ( email )

Michaela Pagel

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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