A rational theory for disposition effects

Min Dai, Yipeng Jiang, Hong Liu, Jing Xu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

Extant theories on the disposition effect are largely silent on most of the disposition-effect related trading patterns, including the V-shaped probabilities of buying and selling against unrealized profit. On the other hand, portfolio rebalancing and learning have been shown to be important, even for retail investors. We show that rational rebalancing with transaction costs and unknown expected returns can generate many disposition-effect-related trading patterns, including the V-shape results. Our paper complements the extant theories by suggesting that portfolio rebalancing may also constitute a significant driving force behind the disposition effect and the related patterns.

Original languageEnglish
Pages (from-to)1-27
Number of pages27
JournalReview of Economic Dynamics
Early online date31 Jan 2022
DOIs
Publication statusE-pub ahead of print - 31 Jan 2022

Keywords

  • Disposition effect
  • Learning
  • Portfolio rebalancing
  • Transaction costs

ASJC Scopus subject areas

  • Economics and Econometrics

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