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Robust dynamic trading with realization utility

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  • Zhang, Jinping
  • Zhou, Lei
  • Zou, Zhentao

Abstract

We incorporate model uncertainty into the intertemporal realized utility model proposed by Ingersoll and Jin (2013). We find: (1) model uncertainty erodes the investor’s value and makes him more willing to take the risk; (2) when ambiguity aversion is sufficiently high, voluntary realization of losses will not occur; (3) model uncertainty accelerates sales, thus shortening the average holding period and strengthening the disposition effect; (4) the disposition effect is weaker in the lower volatility case under model uncertainty, which is consistent with the empirical results; (5) model uncertainty alters the effect of volatility on the sale decision.

Suggested Citation

  • Zhang, Jinping & Zhou, Lei & Zou, Zhentao, 2024. "Robust dynamic trading with realization utility," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004440
    DOI: 10.1016/j.econlet.2024.111960
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    References listed on IDEAS

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    More about this item

    Keywords

    Model uncertainty; Realization utility; Prospect theory; Disposition effect;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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