The momentum of the king stocks in Taiwan trading market–by analysis of behavioral finance framework
Date Issued
2006
Date
2006
Author(s)
Huang, Han-Chung
DOI
en-US
Abstract
In Taiwan the word “king stock” represents the stock that has the highest price in the market and related issues have been discussed elaborately by many. We briefly introduce the king stocks’ features and development in Taiwan. In order to research the momentum of the king stocks, we use behavioral finance frameworks including prospect theory, mental accounting, and disposition effect, to begin analysis. Individual investors tend to sell king stocks that have unrealized capital gains because of disposition effect derived from prospect theory and mental accounting, especially they use “margin purchase.” Therefore, the king stocks’ price may be undervalued due to individual investors’ selling, but institutional investors would buy the king stocks thus generate the momentum effect. Reference from the model of Grinblatt and Han (2005), our model presents that the unrealized gains, turnover ratio, and sales growth rate all have positive impact on expected returns at the next date. The empirical analysis points out that the unrealized capital gains and turnover ratio at t-1 date both have positive impact on expected returns at t+1. Since individual investors had unrealized capital gains overhung at t-1, they sold the king stocks thus allowing institutional investors to buy the undervalued king stocks. These trading behaviors result in king stocks’ momentum existing and correspond to practical conditions that a decrease of the purchase on the percentage of margin utilization and an increase of foreign shareholding which are both beneficial to king stocks’ price going upward in the future.
Subjects
股王
行為財務學
展望理論
心理帳戶
處分效果
漲勢動能
融資
king stocks
behavioral finance
prospect theory
mental accounting
disposition effect
momentum
margin purchase
Type
thesis
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