@article{93cc1694c5cb44909433676fcd18f4f7,
title = "A Rational Theory for Disposition Effects",
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.",
keywords = "Disposition effect, Learning, Portfolio rebalancing, Transaction costs",
author = "Min Dai and Yipeng Jiang and Hong Liu and Jing Xu",
note = "Funding Information: We are grateful to Vincenzo Quadrini (the editor), an anonymous referee, Georgy Chabakauri (EFA discussant), Bing Han, David Hirshleifer, Philipp Illeditsch (SFS Cavalcade discussant), Stijn Van Nieuwerburgh, Kenneth Singleton, Dimitri Vayanos, Liyan Yang, and seminar participants at Australian National University, the 28 th AFB Conference, Boston University, CKGSB, 2016 EFA Annual Meeting, National University of Singapore, 2016 SFS Cavalcade, 2016 SIF conference, Singapore Management University, Tsinghua University, University of Calgary, University of Melbourne, University of New South Wales, University of Rochester, Universite Paris Diderot, Renmin University of China, and Washington University in St. Louis for helpful comments. We thank Terrance Odean for providing us with the brokerage trading data used in Odean (1998) . This paper was previously circulated under the title “Multiple Birds, One Stone: Can Portfolio Rebalancing Contribute to Disposition-effect-related Trading Patterns?” The authors have no conflicts of interests to disclose. Jing Xu acknowledges financial support from the National Natural Science Foundation of China (Grant Number 71801216 ). Funding Information: We are grateful to Vincenzo Quadrini (the editor), an anonymous referee, Georgy Chabakauri (EFA discussant), Bing Han, David Hirshleifer, Philipp Illeditsch (SFS Cavalcade discussant), Stijn Van Nieuwerburgh, Kenneth Singleton, Dimitri Vayanos, Liyan Yang, and seminar participants at Australian National University, the 28th AFB Conference, Boston University, CKGSB, 2016 EFA Annual Meeting, National University of Singapore, 2016 SFS Cavalcade, 2016 SIF conference, Singapore Management University, Tsinghua University, University of Calgary, University of Melbourne, University of New South Wales, University of Rochester, Universite Paris Diderot, Renmin University of China, and Washington University in St. Louis for helpful comments. We thank Terrance Odean for providing us with the brokerage trading data used in Odean (1998). This paper was previously circulated under the title “Multiple Birds, One Stone: Can Portfolio Rebalancing Contribute to Disposition-effect-related Trading Patterns?” The authors have no conflicts of interests to disclose. Jing Xu acknowledges financial support from the National Natural Science Foundation of China (Grant Number 71801216). Publisher Copyright: {\textcopyright} 2022 Elsevier Inc.",
year = "2023",
month = jan,
doi = "10.1016/j.red.2021.11.003",
language = "English",
volume = "47",
pages = "131--157",
journal = "Review of Economic Dynamics",
issn = "1094-2025",
publisher = "Academic Press Inc.",
}