Usage of conditional orders and the disposition effect in the stock market

Abstract

This paper examines the impact of conditional order usage on the disposition effect in the stock market. Taking advantage of proprietary Australian stock brokerage data, we employ propensity score matching method to create a control group. Through this methodology, we are able to isolate the impact of conditional orders from other confounding factors that influence the disposition effect. Our study adds robust empirical evidence on the causal effect of conditional orders to the disposition effect literature. We find that conditional orders reduce the disposition effect by both increasing the sale of losers and decreasing the sale of winners. We also find that, while the disposition effect can be significantly reduced, it cannot be eliminated completely with known strategies. This study complements the literature with increased knowledge of the realised and paper-return differences achieved by conditional order users compared to those of non-users.