The Disposition Effect and Underreaction to News
Author: FRAZZINI, ANDREA
Source: The Journal of Finance, Volume 61, Number 4, August 2006 , pp. 2017-2046(30)
This paper tests whether the “disposition effect,” that is the tendency of investors to ride losses and realize gains, induces “underreaction” to news, leading to return predictability. I use data on mutual fund holdings to construct a new measure of reference purchasing prices for individual stocks, and I show that post-announcement price drift is most severe whenever capital gains and the news event have the same sign. The magnitude of the drift depends on the capital gains (losses) experienced by the stock holders on the event date. An event-driven strategy based on this effect yields monthly alphas of over 200 basis points.
Document Type: Research Article
Publication date: August 1, 2006