Investor V-shaped Disposal Effect And Asset Pricing

Traditional financial theory is based on the rational person hypothesis and expected utility theory,and believes that investors' trading decisions should depend on the expected total wealth generated by the investment,that is,investors should look forward.However,in reality,investors tend to look back.The style fact is that investors are more likely to sell the stocks that have appreciated and continue to hold the losers-disposition effect(Shefrin & Statman,1985).Disposition effect exists widely in financial markets and is "one of the most robust characteristics of individual investor(Barberis & Xiong,2009)" and "the most significant trading anomaly(Ben-David & Hirshleifer,2012)".Disposition effect can have systemic effects on the trading volume and stock price,causing momentum effects(Grinblatt & Han,2005;Li & Yang,2013;Shumway & Wu,2005)and post-earning announcement drift(Frazzini,2006).David & Hirshleifer(2012)finds that American individual investors have a V-shaped disposition effect,that is,the probability of selling stocks increases with the magnitude of gain or loss,and increases faster on the gain side.Although the disposition effect is one of the most important feature of investors' trading behavior,related research is not sufficient because that requires investors' transaction data.This paper uses the daily transaction and position data of randomly selected 500,000 A-share individual investors and all mutual funds between 2011 and 2017 provided by Shanghai Stock Exchange to study whether A-share investors have a V-shaped disposition effect and its effect on stock prices.This research is helpful to detect stylized facts of investors' trading behavior and to provide a reference for theoretical model.It also helps to clarify the source of disposition effect and explore the role of preferences in the formation of disposition effect.The V-shaped disposition effect provides a new perspective for understanding how investor behavior affects stock prices.Stocks with large gains or losses will face higher selling pressure and will be temporarily undervalued.As a result,higher return will be generated in the future.This helps to deepen the understanding of the formation of asset prices.The impact of the V-shaped disposition effect on stock prices has not been widely verified,and it needs the support of empirical results from more samples.For a long time,the A-share market has been dominated by individual investors and their trading biases are more obvious.This provides a suitable background for our research.Our results have implications on how individual investor can achieve profit.This article proceeds as follows.First,we study the existence of V-shaped disposition effect among individual investors and mutual funds:(1)whether the investor has sign preference-when stock return changes from negative to positive,the selling probability increases sharply;(2)whether the relationship between the probability of selling stocks and the size of unrealized profit is V-shaped,that is,the selling propensity increases with the magnitude of unrealized gains or losses,the lowest occur at zero return and increase faster on the gain side.Second,we explore the impact of the V-shaped disposition effect on A-share stock prices.Investors not only tend to sell stocks with large unrealized gains,but also stocks with large losses,which will make such stocks currently undervalued due to greater selling pressure,and generate higher returns when price converges to fundamental value in the future.We construct a metric VNSP-V-shaped net selling propensity-to measure the selling pressure and examine whether VNSP has a significant positive impact on the stock's return in the next month.For individual investors,our findings are as follows.First,we confirm the existence of disposition effect and find individual investors hold stocks less than 20 trading days in most cases.The shorter is the holding time,the more obvious is the disposition effect.Second,the shaped of disposition effect is more special:(1)when unrealized return changes from negative to positive,the probability of selling jumps upward;(2)the selling probability is more sensitive to gains than losses: the selling probability increases by approximately 1.17% with 1% increase in unrealized gain and only 0.44% for 1% increase in losses.The difference is 2.64 times and the figure is 1.05 in US stock market.Third,the disposition effect difference between Chinese and US individual investor may be explained by salience theory,capital gains tax,and the length of holding time.Finally,V-shaped disposition effect exhibits heterogeneity among different individual investors.The strength of disposition effect is more related to the selling probability's sensitiveness to unrealized gains.Investors with more sever disposition effect should be more sensitive to unrealized gains,which is confirmed among female,older and less educated investors.For mutual funds,our findings are as follows.First,mutual funds holds stocks less than 120 trading days(half a year)with the percentage being 92.91% and less than 20 trading days(one month)with the percentage 53.91%.Second,as professional investors,mutual funds achieved better profit,and they profit in 52% of the holding period.Third,the probability of selling winners is not systematically higher than that of selling lossers and there is no upward jump at zero return,that is,there is no obvious “sign preference”.Finally,the relationship between selling probability and unrealized gains/losses is also V-shaped.The V-shaped relationship is asymmetric: the sensitivity of selling to unrealized gains is only 50% of that to losses and is only 21% of individual investors.In summary,there exists no disposition effect in mutual funds.The V-shaped disposition effect can significantly affect the future returns of Ashare stocks.First,portfolio analysis finds that a hedged portfolio that longs largest VNSP stocks and shorts smallest VNSP stocks can obtain 0.88% to 1.16% monthly ? adjusted by Fama-French three-factor.After controlling size,book-to-market ratio,return inversal,idiosyncratic volatility,turnover and liquidity,the hedged portfolio can still obtain a monthly ? of 0.74 to 1.21%.In addition,the profit of this strategy mainly comes from the long position.Second,Fama-Macbeth regression results indicate that a 1% increase in VNSP can bring about 0.14% monthly excess returns.After controlling market microstructure factors such as liquidity,the frequency of data used to calculate VNSP,and changing the time horizon when calculating VNSP,the predictive power of VNSP still holds.Finally,we confirm that the predictive effect of VNSP on future stock prices comes from investors' speculative trading motivation.the predictive effect of VNSP on future stock returns is stronger among stocks with more obvious speculative characteristics.We find that VNSP's predictive power is stronger in stocks with smaller size,lower institutional shareholding,fewer analyst coverage,higher turnover,greater idiosyncratic volatility and greater stock price volatility Taking institutional shareholdings as an example,in the low institutional shareholding stocks,a 1% increase in VNSP can bring nearly 0.15% monthly excess return,while in the high institutional shareholding stocks,this figure is only 0.10%.The main contributions of this paper are as follows.First,we find a stylized fact of Chinese A-share investors' trading behavior and therefore enriches the disposition effect.Based on a large sample of Chinese individual investors and mutual funds,it is found that in general,there is a new type of selling behavior characteristic for individual investors-V-shaped disposition effect: with extreme gain and loss,the tendency to sell will increase,and increase more on the gain side.Moreover,the disposition effect of A-share individual investors is more obvious than that of U.S.individual investors,mainly due to the obvious sign preference and the difference between the sensitivity of selling decisions to unrealized gains and losses is more obvious.Previous studies on disposition effect,especially domestic related studies,often focus on the existence and influencing factors of disposition effect,and only care about the sign of holding return.Our study examines the effect of both the sign and size of holding returns on investors' selling decisions.In addition,we find that there is no disposition effect among mutual fund in China.Second,we confirm V-shaped disposition effect can affect asset pricing.There are a large number of individual investors in Chinese stock market and speculative atmosphere is severe,which provides a suitable environment for testing the impact of investor behavior biase on stock prices.Few papers have studied the impact of disposition effect on A-share stock prices.We find that VNSP can positively predict stock's future return.Our research enriches the disposition effects,deepens the understanding of the formation of A-share stock prices,and also have implications on investment practice.Third,we confirm that the "realization preference" can at least partially explain disposition effect.Ben-David & Hirshleifer(2012)questioned whether investor preferences could explain disposition effect while Weisbrod(2019)support the view that different preference for gain and loss can incur disposition effect.We find that the selling probability increases sharply when unrealized return turns from negative to positive,that is,there is a "sign preference" and therefore support investor preferences could explain disposition effect."Sign preference" can explain 13% of disposition effect.Fourth,we enriched the research about the impact of speculative trading on stock prices.From the perspective of stockholders' selling decisions,we find that speculative trading motive plus disposition effect will result in undervaluation.Past research often pay more attention to the overvaluation side from the perspective of investors' buying decisions.So our study and past research just focuse on different stages of speculative trading affecting stock prices.Finally,our research relies on unique data.Our data comes from the Shanghai Stock Exchange,covering daily trading and position data of 500,000 randomly selected individual investors and all mutual funds between 2011 and 2017.The data source is authoritative,the time horizon is long enough and therefore our conclusions are representative.