The Disposition Effect in Boom and Bust Markets
Authors: Sabine Bernard (SAFE), Benjamin Loos (Technical University of Munich), and Martin Weber (University of Mannheim)
Title: The Disposition Effect in Boom and Bust Markets
Abstract: The disposition effect is implicitly assumed to be constant over time. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals being 25% more likely to realize gains in bust than in boom periods. These changes in investors’ selling behavior can be linked to changes in investors’ risk aversion and in their beliefs across financial market cycles.