The Disposition Effect in Boom and Bust Markets
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Date
2021-02-05
Author
Bernard, Sabine
Loos, Benjamin
Weber, Martin
SAFE No.
305
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Abstract
The disposition effect is implicitly assumed to be constant over time. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals being 25% more likely to realize gains in bust than in boom periods. These changes in investors’ selling behavior can be linked to changes in investors’ risk aversion and in their beliefs across financial market cycles.
Research Area
Household Finance
Keywords
disposition effect, financial market cycles, household finance, retail investor
JEL Classification
D14, G11, G28
Research Data
Topic
Investor Behaviour
Saving and Borrowing
Fiscal Stability
Saving and Borrowing
Fiscal Stability
Relations
1
Publication Type
Working Paper
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- LIF-SAFE Working Papers [334]