Abstract
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.
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 language | English |
---|---|
Pages (from-to) | 1-67 |
Number of pages | 67 |
Journal | Journal of Finance |
Publication status | Accepted/In press - 15 Sept 2023 |