Drivers of the Disposition Effect: A Study Testing for Motivating Forces of Investors' Propensity to Realize Gains over Losses

Sammanfattning: In this thesis, 2,864,940 trade transactions of 125,555 US retail investors from 1991-1996 are analyzed to investigate if variations in the disposition effect, the tendency of investors to sell winning investments too soon and hold losing investments too long, can be explained by investor sentiment and implied market volatility. First, we run a regression analysis between the disposition effect and market sentiment, where results show no significant correlation. This indicates that investors' readiness to realize winners over losers is not driven by aggregated beliefs of market direction. Secondly, we run a regression between the disposition and implied market volatility. Here, results show an economic significant positive correlation. This suggests that investors are more disposed to realize winners than losers during times of high expected market uncertainty. Finally, we test if this correlation is driven by certain stock characteristics. Results indicate that the market capitalization and idiosyncratic volatility of stocks are valued factors in investors' readiness to realize winners over losers in times of high anticipated market volatility.