Some gains are riskier than others: Volatility changes and the disposition effect

13/06/2024

Some gains are riskier than others: Volatility changes and the disposition effect

Ellapulli V. Vasudevan

Journal Articles

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I examine whether investors revise their beliefs about a stock's risk due to an increase in the stock's volatility. This revision makes loss-averse investors more willing to sell a riskier stock with a paper gain as the likelihood of having to sell it at a loss later increases. An analysis of a large Finnish dataset on the holdings and trades of individual investors yields empirical support for this prediction: a one standard deviation increase in volatility is associated with an 11% increase in the disposition effect. The effect primarily emerges from investors' increased propensity to sell stocks with small paper gains.

IIMA