To set or not to set, that is the question:he effect of stop-loss and stop-gain on investor behavior
Date Issued
2008
Date
2008
Author(s)
Hsueh, Pin-Jung
Abstract
This paper investigates different types of investors to see those who would use the “stop-loss” and “stop-gain” mechanisms, and how they affect their behavior. Furthermore, whether investors execute the mechanism or not is also an important factor concerning the effectiveness of those two mechanisms. This study also looks at the “disposition effect”, by which setting stop-loss could prevent investors from holding the losers too long. The main findings are as following:. Highly-educated or high-income investors would be more likely to use the stop-loss order or stop-gain order.. Contrary to the usual understanding, we find a “reverse disposition effect” exist in our sample, however, if we looked at only the investors who set the stop-loss point higher than stop-gain point, the disposition effect will indeed appear.. There are more investors who will postpone executing the stop-loss orders than stop-gain orders.. Investors who set higher stop-loss point or lower stop-gain point would be more likely to face disposition effect.. Investors who use the stop-loss or stop-gain mechanisms would have higher return, higher sell-turnover and lower holding period.. Comparing to investors who didn’t execute the orders duly, those who execute the orders around the point (±3%) they had set would make the highest return. Comparatively, the behavior of disposition effect would result in the lowest return.
Subjects
Stop-loss
Stop-gain
Disposition Effect
Financial Behavior.
Type
thesis
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