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A heterogeneous model of disposition effect

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  • Mao-Wei Hung
  • Hsiao-Yuan Yu

Abstract

A portfolio choice model is provided to illustrate the disposition effect under irrational belief in mean reversion assumption. Higher cognitive reference, stronger irrational belief in mean reversion magnitude and less risk aversion all strengthen the disposition effect in the model. The equilibrium market interest rate is priced after the market clearing condition is employed. The grater disposition effect reduces the capital mobility from the stock market to the bond market and thus mitigates the dropping of the market interest rate.

Suggested Citation

  • Mao-Wei Hung & Hsiao-Yuan Yu, 2006. "A heterogeneous model of disposition effect," Applied Economics, Taylor & Francis Journals, vol. 38(18), pages 2147-2157.
    • Handle: RePEc:taf:applec:v:38:y:2006:i:18:p:2147-2157
    DOI: 10.1080/00036840500427403
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    References listed on IDEAS

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    1. Leonid Kogan & Raman Uppal, "undated". "Risk Aversion and Optimal Portfolio Policies in Partial and General Equilibrium Economies," Rodney L. White Center for Financial Research Working Papers 13-00, Wharton School Rodney L. White Center for Financial Research.
    2. Bing NMI1 Han & Mark Grinblatt, 2001. "The Disposition Effect and Momentum," Yale School of Management Working Papers ysm239, Yale School of Management.
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    Cited by:

    1. Daniela Vesselinova Balkanska, 2018. "Disposition effect and analyst forecast dispersion," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 837-859, April.
    2. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.

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