Information Asymmetry, Price Momentum, and the Disposition Effect

46 Pages Posted: 8 Dec 2003

See all articles by Günter Strobl

Günter Strobl

University of Vienna - Department of Finance

Date Written: February 2003

Abstract

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

Strobl, Günter, Information Asymmetry, Price Momentum, and the Disposition Effect (February 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=474221 or http://dx.doi.org/10.2139/ssrn.474221

Günter Strobl (Contact Author)

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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