Proceedings of the 11th Economics & Finance Conference, Rome

MOMENTUM AND DISPOSITION EFFECT IN THE STOCK MARKET OF USA

RANJEETA SADHWANI, MUJEEB U REHMAN BHAYO

Abstract:

This paper analyze whether momentum effect drives disposition effect and vice versa during the period of January 1963 to 2017 in the stock market of USA. To examine the relationship, Fama and Macbeth (1973) cross sectional regressions are performed in the study. The results show that disposition effect drives momentum but not the other way around. Furthermore, this relationship is also examined for three sub-samples, and we find that relationship between momentum and disposition effect varies over the time and one possible reason could be crisis as sample is divided on the basis of the dot-com bubble and global financial crisis. Another finding of the study is that along with the disposition effect, size also has an impact on the momentum effect. To further analyze the impact of size on momentum and disposition effect, we test the relationship between momentum and disposition effect on the basis of size deciles. The results demonstrate that relationship does not vary significantly over the size of stocks but it does have an impact on momentum and disposition effect as past cumulative returns, and capital gain varies monotonically with the increase in the size of stocks.

Keywords: Momentum, Disposition effect, Fama-Macbeth regression, Behavioral Finance, Size effect

DOI: 10.20472/EFC.2019.011.012

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