Information Asymmetry, Price Momentum, and the Disposition Effect
46 Pages Posted: 8 Dec 2003
Date Written: February 2003
Economists have long been puzzled by the tendency of investors to sell winning investments too soon and hold losing investments too long. Several behavioral explanations for this phenomenon, known as the disposition effect, have been advanced. This paper demonstrates that disposition effects are not intrinsically at odds with rational behavior. Specifically, we show (i) that disposition effects arise quite naturally in a world with changing information asymmetry, (ii) that existing empirical tests rejecting an information-based explanation are inconclusive, and (iii) that disposition effects are consistent with price momentum. We further derive new empirical implications relating disposition behavior to trading volume, return variability, and price dynamics.
Keywords: disposition effect, behavioral finance, rational expectations
JEL Classification: D82, D83, G14
Suggested Citation: Suggested Citation