To Sell or Not to Sell? Disposition Effect and Investment Style
37 Pages Posted: 3 Feb 2022 Last revised: 25 Apr 2023
Date Written: January 28, 2022
Abstract
In my sample of active mutual funds, the disposition effect is driven by investment style. I find a strong disposition effect for value funds but I find no disposition effect for growth funds. While value funds need to hold on to "loser" stocks, growth funds need to hold on to "winner" stocks (the opposite of the disposition effect). Focusing on a subsample of managers who manage value and growth funds at the same time, I find that these managers show a disposition effect for their value funds but no disposition effect for their growth funds. I make similar findings when focusing on a sample of passive index funds. These findings call into question the traditional understanding of the disposition effect as a behavioral bias.
Keywords: Mutual Funds, Disposition Effect
JEL Classification: G11, G23, G40
Suggested Citation: Suggested Citation