Information Asymmetry, Price Momentum, and the Disposition Effect
Economists have long been puzzled by the tendency of investors to sell winning investments too soon and hold losing investments too long. Several behavioral explanations for this phenomenon, known as the disposition effect, have been advanced. This paper demonstrates that disposition effects are not intrinsically at odds with rational behavior. Specifically, we show (i) that disposition effects arise quite naturally in a world with changing information asymmetry, (ii) that existing empirical tests rejecting an information-based explanation are inconclusive, and (iii) that disposition effects are consistent with price momentum. Further, we derive new empirical implications relating disposition behavior to trading volume, return variability, and price dynamics.
Source:
Strobl, Günter, Information Asymmetry, Price Momentum, and the Disposition Effect (February 2003). AFA 2004 San Diego Meetings. Available at SSRN: http://ssrn.com/abstract=474221 or doi:10.2139/ssrn.474221
Keywords: disposition effect, behavioral finance, rational expectations
