Dynamic Trading with Realization Utility

Min Dai, Cong Qin, Neng Wang

Research output: Journal article publicationJournal articleAcademic researchpeer-review


An investor receives utility bursts from realizing gains and losses at the
individual-stock level (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013)
and dynamically allocates his mental budget between risky and risk-free assets at
the trading-account level. Using savings, he reduces his stockholdings and is more
willing to realize losses. Using leverage, he increases his stockholdings beyond his
mental budget and is more reluctant to realize losses. While leverage strengthens
the disposition effect, introducing leverage constraints mitigates it. Our model
predicts that investors with stocks in deep losses sell them either immediately or
after stocks rebound a little.
Original languageEnglish
Pages (from-to)1-67
Number of pages67
JournalJournal of Finance
Publication statusAccepted/In press - 15 Sept 2023


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