Does Disposition Drive Momentum?

23 Pages Posted: 19 Mar 2005

See all articles by Tyler Shumway

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: March 15, 2005


We test the hypothesis that the dispositon effect is a behavioral bias that drives stock price momentum. Using data from a large Shanghai brokerage firm, we estimate the magnitude of the disposition effect for a sample of 13,460 Chinese investors and firms. We find that a large majority of Chinese investors exhibit the disposition effect. An investor's disposition coefficient estimated with one year of data forecasts that investor's disposition effect and investment performance in subsequent years. More disposition-prone investors tend to trade less frequently and in smaller sizes than other investors. While past returns do not forecast future returns in our relatively short sample of Shanghai Stock Exchange stocks, sorting stocks by the net unrealized gains or losses of disposition-prone investors generates a statistically significant winner/loser spread of seven percent per year. Our results suggest that disposition does indeed drive momentum.

Keywords: Disposition, momentum

JEL Classification: G12, G11

Suggested Citation

Shumway, Tyler and Wu, Guojun, Does Disposition Drive Momentum? (March 15, 2005). AFA 2006 Boston Meetings Paper, Available at SSRN: or

Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)


Guojun Wu

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)


China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030

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