Does Disposition Drive Momentum?
University of Michigan at Ann Arbor, The Stephen M. Ross School of Business
University of Houston; China Academy of Financial Research (CAFR)
March 15, 2005
AFA 2006 Boston Meetings Paper
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.
Number of Pages in PDF File: 23
Keywords: Disposition, momentum
JEL Classification: G12, G11
Date posted: March 19, 2005