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The Prevalence of the Disposition Effect in Mutual Funds’ Trades

Published online by Cambridge University Press:  12 June 2012

Gjergji Cici
Gjergji Cici*
Affiliation:
Mason School of Business, College of William and Mary, Williamsburg, VA 23187, and Centre for Financial Research, University of Cologne, Cologne, Germany, gjergji.cici@mason.wm.edu
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Abstract

U.S. equity mutual funds, on average, prefer realization of capital losses to capital gains. Nevertheless, a substantial fraction exhibits the disposition effect of realizing gains more readily than losses. My analysis suggests that learning effects have reduced the manifestation of the disposition effect over time, implying that academic research has influenced industry practices. When funds experience outflows and are managed by teams of portfolio managers, they are more susceptible to selling disproportionately more winners than losers. Disposition-driven behavior affects investment style, causing lower market betas and characteristics of value-oriented and contrarian styles, but has no observable effect on fund performance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 795 - 820
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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