The Disposition Effect and Contrarian Profits
Date Issued
2009
Date
2009
Author(s)
Shen, Yu-Jan
Abstract
This paper tests whether the disposition effect, that is the tendency of investors to hold on to losses too long and realize gains too soon, plays a pivotal role in explaining the short-term contrarian profits. We collect the monthly data associated with all NYSE/AMEX common stocks from 1962 to 2007 and use to construct an aggregate measure of reference purchasing prices for individual stocks. Our study shows that the level of accumulated capital gains/losses is highly associated with investors’ overreaction to information. The interaction between past returns and paper gains/losses generates predictable subsequent price reversals. A contrarian strategy consisting of short-selling winner stocks with large paper losses and buying loser stocks with large paper gains yields monthly abnormal returns of over 200 basis points.
Subjects
Disposition Effect
Short-Term Contrarian Profits
Capital Gains Overhang
Return Predictability
Type
thesis
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