Dynamic Trading with Realization Utility

67 Pages Posted: 30 Jan 2022 Last revised: 15 Sep 2023

See all articles by Min Dai

Min Dai

The Hong Kong Polytechnic University

Cong Qin

Soochow University

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2022

Abstract

An investor receives utility bursts from realizing gains and losses at the individual-stock level (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013) and dynamically allocates his mental budget between risky and risk-free assets at the trading-account level. Using savings, he reduces his stockholdings and is more willing to realize losses. Using leverage, he increases his stockholdings beyond his mental budget and is more reluctant to realize losses. While leverage strengthens the disposition effect, introducing leverage constraints mitigates it. Our model predicts that investors with stocks in deep losses sell them either immediately or after stocks rebound a little.

Keywords: prospect theory; loss aversion; option value; disposition effect; leverage; time diversification

JEL Classification: D03, G11, G12

Suggested Citation

Dai, Min and Qin, Cong and Wang, Neng, Dynamic Trading with Realization Utility (January 29, 2022). Columbia Business School Research Paper No. 4021117, Available at SSRN: https://ssrn.com/abstract=4021117 or http://dx.doi.org/10.2139/ssrn.4021117

Min Dai

The Hong Kong Polytechnic University ( email )

Cong Qin (Contact Author)

Soochow University ( email )

No. 1 Shizi Street, Center for Financial Engineeri
Suzhou, 215006
China
13656190706 (Phone)

Neng Wang

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4 04-05
1 Business Link
Singapore, 117592
Singapore

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
195
Abstract Views
736
Rank
272,499
PlumX Metrics