An examination of the relationship between the disposition effect and stock return, volatility, and trading volume: the evidence in US stock markets

Abstract

The disposition effect in stock markets is one of the most robust behavioural regularities documented in studies of trading behaviour. The aim of this study was to seek a direct link between the disposition effect and asset price dynamics. We connect our work to the theoretical literature on the implications of the disposition effect on stock return and test the relationship between the disposition effect and the volatility, trading volume and turnover. Using daily data of 432 stocks traded on the NYSE and NASDAQ during the 2006-2015 periods, we found a negative and significant correlation, as the theory requires. The regressions results show that the disposition proxy is associated with lower returns, less volatility and smaller trading volume at the stock level. These findings are coherent with the presence of a common disposition effect-related factor. The exposure of a stock to this factor is related to lower ex post returns.