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Momentum trading, disposition effects and prediction of future share prices: an experimental study of multiple reference points in responses to short- and long-run return trends

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  • Henrik Svedsater
  • Niklas Karlsson
  • Tommy Garling

Abstract

Returns of equities tend to exhibit momentum in the short to medium term and reversals in the longer term. While presenting results partly supporting such findings, we demonstrate that investors rely on multiple reference points in their trading behaviour. In particular it is shown that the interaction between long- and short-run returns may have important explanatory value for investment decisions. Predictions of future stock prices furthermore tend to be positively biased when evaluated against trading patterns, while loss aversion may drive investors to sometimes act against their beliefs about market sentiments. Implications for market responses to price movements are discussed.

Suggested Citation

  • Henrik Svedsater & Niklas Karlsson & Tommy Garling, 2009. "Momentum trading, disposition effects and prediction of future share prices: an experimental study of multiple reference points in responses to short- and long-run return trends," Applied Financial Economics, Taylor & Francis Journals, vol. 19(8), pages 595-610.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:8:p:595-610
    DOI: 10.1080/09603100801982620
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    2. Cheng-Po Lai, 2019. "Personality Traits and Stock Investment of Individuals," Sustainability, MDPI, vol. 11(19), pages 1-20, October.

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