Model and Variable Definition

The so-called disposition effect is to test whether investors prefer to sell assets that have gained value and keep assets that have lost value. When investors sell assets, it will lead to increase the trading volume, and when investors keep assets, it will lead to decrease the trading volume. The model is following Ferris, Haugen and Makhija (1988) as stated below.

1. First, we estimate the daily abnormal turnover for each country relative to Market Portfolio ( All Countries world Index, ACWI ):

V_it =A_i+B_iV_im +e_it ………(4)

The weight of a country in an MSCI index is calculated in the following way:

Weight² = 100

Following Beaver (1968), Dyl (1977), and Lakonishok and Smidt (1986), equation (3) allows us to estimate e , the fraction of the market value of country i traded on day t after _it removing the effects of market-wide events.

2. The relation of the abnormal turnover, e , for the weighted price index of each _it country, P , to its past turnover is formulated in the following fashion: _it

a. Eight price ranges around P are considered to classify past price for the stock, _it P , where n is a trading day in the past. These ranges are in

2 FIF is the Foreign Inclusion Factor.

Range 1 : P_it <P_in ≤(1+x)P_it

Range 2 : (1+x)P_it <P_in ≤(1+2x)P_it Range 3 : (1+2x)P_it <P_in ≤(1+3x)P_it Range 4 : (1+ )3x P_it <P_in

Range 5 : P_it ≥P_in >(1−x)P_it

Range 6 : (1−x)P_it ≥P_in >(1−2x)P_it Range 7 : (1−2x)P_it ≥P_in >(1−3x)P_it Range 8 : (1− )3x P_it ≥P_in

=

x 0.025, 0.05, 0.075, and 0.1.

where

P : the weighted price index of each country i trading on day t . it

P : the weighted price index of each country i trading on day n. in

n : the past trading day, going back for one calendar year(365 calendar days) x : the rank of eight ranges to classify four kinds.

The main idea of this step is to classify the eight ranges to identify capital gain or capital loss. Each past trading day, going back for on calendar year (365 calendar days), if the price index (P ) is greater than the past price index (_it P ), there is capital gain. _in Conversely, there is capital loss. Range 1 is the maximum capital loss and from the range 2 to range 4 is decreasing progressively. Conversely, from range 5 to range 7 are increasing progressively, and range 8 is the maximum capital gain.

b. After classification, we will accumulate the trading volume of every range. The raw (now abnormal) trading volume for that day is assigned to that range and all the volumes assigned to a range are added. Therefore, we will have eight cumulative trading volumes,

each representing the total cumulative trading volumes on different range.

3. Then we run a time-serious regression model:

it

According the hypothesis, if the disposition effect is valid, we will expect that H1 :

β

_k <0 for k =1、2、3、4 and

β

_k >0 for k =5、6、7、8

4. Comparing the disposition effect degree between developed markets and emerging markets:

According to the step 3, when the loss range exists the disposition effect, the coefficient is negative. Conversely, the coefficient is positive.

First, we calculate the total numbers of significant level that match to the expectation to compare the degree of disposition effect with each market.

Second, we calculate the total score in order to compare the degree of disposition effect between developed markets and emerging markets. We set up three kinds of standards. First, we set the score as 1 when the symbol match to the expectation and significant. Second, we set the score as -1 when the symbol doesn’t match to the expectation and significant. Third, we set the score as 0 when the symbol is not significant and whatever the symbol match to the expection or not. We will sum the total score for the four ranks of x to compare the degree of disposition effect between developed markets

and emerging markets.

3.2 The Research Subjects, Sources of Data and Research Period

3.2.1 Research Subjects

Our subjects are to compare the disposition effect between major developed markets and emerging markets. When we estimate the abnormal turnover, the weighting price index of all countries is calculated using the 24 developed and 27 emerging markets according to global index of Morgan Stanley Capital International Inc.(MSCI) (see Table 1).

MSCI is a leading provider of global indices and benchmark related products and services for investors worldwide. It is headquartered in New York, and conducts business worldwide with operations in Geneva, London, Hong Kong, Tokyo, Singapore, Sydney, Frankfurt, Milan, Paris, Princeton and San Francisco. The business of MSCI is to provide benchmark products and services to the investment management community, to distribute index and company-level data and to license the MSCI indices to third parties for the purpose of creating derivatives and proprietary products.

For the global or institutional investors, the proportion of each country in the MSCI index is usually the capital allocation ratio on each country’s stock markets. The proportion of each contury in the MSCI index will be adjusted flexibly according to the stock markets condition around the world. Consequently, the MSCI index is important.

Table 1

Developed Markets and Emerging Markets of All Countries World Index of MSCI Developed Markets Emerging Markets

Australia

3.2.2 Sources of Data and Research Period

The data include: daily data of weighting price index, trading volume, market value for 24 developed and 27 emerging markets. However, some markets have data missing, such as Colombia, Egypt, Germany, Jordan, Morocco, and Sri Lanka. Therefore, our research subjects include 23 developed and 22 emerging markets. Our data period is from November 25, 2002 through November 25, 2005. Sources of these data are from the Datastream database.

3.3 Research Limitations

First, when we calculate the turnover ratio of global index, we ignore the time difference between various countries.

Second, the price limit is different in the stock markets of each country that may cause the disposition effect biased.

Chapter 4

Empirical Results and Analysis

In this chapter, we will show the empirical results of the disposition effect for investors’ behavioral pattern. First, we investigate the disposition effect for each market.

Second, we compare the degree of disposition effect between developed markets and emerging markets.

According to the regression analysis, we have the coefficients and t-value of eight ranges. If the disposition effect exists, the investors will hold the stocks continuously when there are capital losses and make the abnormal turnover reduce. Conversely, the investors will sell the stocks when there are capital gains and make the abnormal turnover rise.

Therefore, if the disposition effect exists, the coefficients

β

₁ through

β

₄ should be significantly negative while the coefficients

β

₅ through

β

₈ should be significantly positive.

4.1 Analysis The Disposition Effect for Each Market

There are four ranks of x to verify the disposition effect. We take the x=0.075 to illustrate the disposition effect in Table 2 (developed markets) and Table 3 (emerging markets). The similar empirical results of other ranks are presented in table 6~11 of appendix A~C.

Table 2

Empirical Results of Developed Market for x=0.075

it

volume for country i for all past days in the previous 365 days from day t in which it traded in range 1. (

E_2it

, etc. are defined similarly.)

(November 25, 2002 through November 25, 2005)

Names of

Markets

α

0

β

₁

β

₂

β

3

β

₄

β

5

β

₆

β

₇

β

_{8 R}²_(adj)

Australia -0.127035 1.61E-09+++ 1.46E-09+++ 1.98E-09+++ 1.54E-09+++ 1.38E-09*** 1.38E-09*** 1.42E-09*** N/A 0.271934 t value (-13.247) (11.790) (10.815) (10.177) (2.606) (11.509) (15.948) (12.087) N/A

Austria -0.002852 4.81E-09+++ 1.69E-09+ 1.40E-08+++ -4.87E-08 1.84E-09** 7.64E-09*** 7.17E-09*** 9.55E-09*** 0.660304 t value (-16.649) (4.150) (1.862) (4.278) (-1.583) (2.364) (9.183) (9.103) (17.088) Belgium -0.017182 1.19E-08+++ 1.36E-08+++ 1.05E-08+++ 1.04E-08+++ 9.54E-09*** 1.08E-08*** 1.45E-08*** 1.23E-08*** 0.482508 t value (-20.804) (11.990) (11.517) (7.841) (14.042) (14.908) (15.088) (21.266) (11.010)

Canada -0.063948 1.71E-09+++ 2.12E-09+++ 1.90E-09+++ 3.16E-09+++ 2.29E-09*** 2.16E-09*** 3.17E-09*** 1.47E-09*** 0.223182 t value (-9.099) (5.971) (4.662) (5.014) (5.298) (8.953) (8.862) (10.315) (2.760) Denmark -0.017559 8.91E-09+++ 1.05E-08+++ 1.06E-08+++ 9.34E-09+++ 8.52E-09*** 1.05E-08*** 1.03E-08*** 1.04E-08*** 0.430558 t value (-14.005) (9.711) (7.911) (9.176) (10.768) (11.531) (14.144) (14.519) (12.828)

Finland -0.013909 2.69E-09+++ 6.22E-10 8.63E-11 1.61E-09++ -9.90E-10 2.48E-09*** 2.06E-09*** -1.78E-12 0.027062 t value (-2.230) (2.597) (0.641) (0.072) (2.200) (-1.175) (3.298) (2.751) (-0.001) France -0.092578 2.68E-09+++ 4.28E-09+++ 4.06E-09+++ 3.23E-09+++ 1.80E-09*** 1.72E-09*** 1.73E-09*** 5.22E-09*** 0.084725 t value (-9.450) (7.837) (5.021) (3.583) (8.772) (7.784) (7.203) (4.398) (4.588)

Greece -0.000648 -1.67E-09*** -1.87E-09 -2.88E-09* -1.14E-09 1.90E-09*** 1.13E-09** 2.14E-09*** -4.57E-11 0.238179 t value (-0.660) (-2.942) (-1.374) (-1.833) (-1.287) (3.017) (2.129) (3.151) (-0.054) Hong Kong -0.005196 -7.06E-11*** 1.50E-11 -6.62E-11* -9.74E-12 6.55E-11*** 6.40E-11*** 1.07E-10*** 4.49E-11** 0.244601 t value (-1.768) (-3.359) (0.580) (-1.928) (-0.388) (3.495) (3.440) (3.625) (2.132) Ireland -0.006611 9.96E-10+++ 9.14E-10++ 3.86E-10 1.97E-09+++ 1.19E-09*** 8.82E-10*** 1.02E-09*** 2.93E-09*** 0.175979 t value (-9.824) (4.976) (2.375) (0.976) (9.925) (7.258) (5.749) (4.937) (4.506) Italy -0.190210 1.24E-09+++ 2.58E-09+++ 6.18E-10++ 1.43E-09+++ 1.11E-09*** 1.33E-09*** 1.49E-09*** -3.45E-09+++ 0.288309 t value (-10.648) (9.683) (11.642) (2.569) (9.598) (9.328) (11.702) (12.983) (-3.194) Japan -0.240039 6.50E-10+++ 1.60E-09+++ 5.25E-10 3.48E-10 1.02E-09*** 1.51E-09*** 1.97E-09*** 1.66E-09*** 0.468718 t value (-8.946) (4.655) (5.100) (1.203) (1.446) (8.240) (10.634) (12.767) (5.655)

Luxembourg 2.10E-05 1.59E-09 -4.90E-09 -3.47E-09 -1.98E-09 -2.96E-09 1.47E-09** -5.33E-09++ 4.35E-09*** -0.002771 t value (0.787) (0.682) (-0.941) (-0.765) (-1.111) (-1.123) (2.483) (-2.423) (4.058)

Netherlands 0.024018 -5.49E-10* -2.02E-09*** -7.27E-10* -3.01E-11 -1.03E-09+++ -7.65E-10+++ -4.52E-10 5.04E-10 0.103781 t value (3.208) (-1.877) (-4.390) (-1.933) (-0.083) (-4.138) (-2.607) (-0.998) (0.210)

New Zealand 0.000669 -9.98E-11 4.04E-11 N/A N/A -2.61E-10 1.19E-10 -2.99E-10 N/A 0.021817

t value (0.615) (-0.501) (0.073) N/A N/A (-1.384) (0.619) (-1.157) N/A

Norway -0.028502 2.25E-09+++ 5.16E-09+++ 3.33E-09+++ 3.59E-09+++ 2.38E-09*** 3.51E-09*** 3.73E-09*** 3.09E-09*** 0.430362 t value (-16.772) (5.844) (7.517) (5.267) (11.915) (7.368) (13.228) (13.625) (14.669)

Portugal -0.001598 2.16E-10++ 9.11E-11 1.16E-10 -1.25E-10 2.57E-10*** -1.26E-11 1.09E-10 5.77E-09*** 0.357782 t value (-2.581) (2.121) (0.495) (0.587) (-0.928) (3.391) (-0.086) (0.667) (16.763)

Singapore 0.001161 -1.12E-10*** -7.42E-11 -2.53E-10*** -4.18E-11 -2.82E-11 7.44E-12 1.28E-10*** -6.68E-12 0.117185 t value (1.245) (-3.958) (-1.072) (-3.495) (-0.917) (-1.330) (0.309) (3.577) (-0.192) Spain -0.138819 4.13E-09+++ 4.95E-09+++ 4.26E-09+++ 4.04E-09+++ 4.31E-09*** 4.06E-09*** 3.55E-09*** 4.40E-09*** 0.311715 t value (-16.303) (13.387) (10.370) (11.299) (13.967) (15.494) (16.177) (12.148) (7.594)

Sweden -0.008185 -7.24E-11 2.72E-10 -4.48E-10* -1.61E-10*** 1.39E-10* 4.40E-10*** -2.04E-10 6.41E-10*** 0.175667 t value (-2.888) (-0.771) (1.239) (-1.727) (-2.084) (1.679) (5.648) (-2.320) (5.335)

Switzerland -0.038416 2.93E-09+++ 7.60E-09+++ 6.70E-09+++ 4.12E-09+++ 3.37E-09*** 5.49E-09*** 1.07E-09 2.31E-10 0.131442 t value (-10.414) (5.745) (6.990) (5.115) (7.347) (6.693) (8.384) (1.071) (0.164)

United Kingdom -0.711254 1.17E-09 1.58E-09 1.29E-09 1.45E-09+++ 1.24E-09*** 1.34E-09*** 1.13E-09*** 2.74E-09*** 0.256910 t value (-14.289) (11.773) (10.783) (9.789) (15.292) (14.958) (13.875) (7.378) (4.002)

USA 1.694063 -2.96E-09** -2.42E-09 -3.72E-09*** -1.51E-09 -2.55E-09++ -3.67E-09++ -4.33E-09+++ -3.63E-09++ 0.166477 t value (1.961) (-1.965) (-1.550) (-2.707) (-1.076) (-1.686) (-2.492) (-2.608) (-2.122)

When the symbol match to the expectation and significant, the significant levels are as follows: * means 10%, ** means 5%, *** means 1%.

When the symbol doesn’t match to the expectation and significant, the significant levels are as follows: + means 10%, ++ means 5%, +++ means 1%.

Table 3

Empirical Results of Emerging Markets for x=0.075

it

volume for country i for all past days in the previous 365 days from day t in which it traded in range 1. (

E_2it

, etc. are defined similarly.)

(November 25, 2002 through November 25, 2005)

Names of

Markets

α

0

β

₁

β

₂

β

3

β

₄

β

5

β

₆

β

₇

β

_{8 R}²_(adj)

Argentina -0.004806 -2.01E-09*** 2.55E-09+++ -1.02E-09 2.40E-09+++ 1.14E-09*** 2.40E-09*** 2.16E-09*** 1.82E-09*** 0.197498 t value (-9.637) (-3.861) (4.266) (-1.256) (7.735) (2.948) (6.845) (6.731) (9.757) Brazil -0.056577 1.92E-09 2.63E-09 -9.51E-10 2.87E-09 8.33E-09*** 3.88E-09*** 6.00E-09*** 9.97E-09*** 0.100516 t value (-4.781) (0.847) (0.922) (-0.215) (0.492) (4.540) (2.255) (3.232) (5.463)

Chile -0.004226 -6.75E-11 9.97E-13 -3.03E-10 -3.59E-09*** 1.34E-10*** 1.21E-10*** 2.15E-10** 2.52E-10** 0.122321 t value (-4.509) (-0.984) (0.008) (-0.658) (-2.828) (3.749) (3.638) (2.350) (2.543)

China -0.109227 1.33E-10 1.03E-09+++ 1.60E-10 7.12E-11 6.22E-10*** 8.82E-10*** 1.39E-09*** 1.15E-09*** 0.428096 t value (-19.708) (1.101) (5.773) (0.781) (0.357) (5.019) (8.233) (7.036) (16.975) Czech Republic -0.023262 3.07E-08+++ 1.01E-07+++ -1.12E-07** -7.68E-08 2.37E-08*** 1.60E-08*** 1.22E-08 7.25E-08*** 0.446639 t value (-12.503) (3.781) (3.676) (-2.071) (-1.276) (3.755) (3.091) (1.568) (11.354)

Hungary -0.007259 1.37E-10 2.56E-08++ -4.06E-08** 1.49E-08 1.23E-08*** 9.22E-09* -7.49E-09 3.06E-08*** 0.189728 t value (-3.147) (0.019) (2.298) (-2.532) (0.669) (3.568) (1.917) (-1.558) (11.182)

India -0.008118 1.92E-09 -4.63E-10 1.06E-08+++ 2.07E-09++ 5.30E-11 -2.89E-09++ -8.42E-09+++ 8.85E-09*** 0.258323 t value (-1.011) (1.368) (-0.284) (4.899) (2.073) (0.037) (-2.180) (-6.469) (11.824)

Indonesia -0.007459 -9.80E-11*** 2.13E-10+++ -1.91E-10* -9.95E-12 1.47E-11 1.30E-10*** 9.78E-11*** 1.73E-10*** 0.231445 t value (-5.605) (-3.226) (3.737) (-1.866) (-0.301) (0.508) (3.986) (3.049) (9.336)

Israel -0.003810 -5.84E-09 7.31E-09 -1.53E-08*** 3.74E-09 3.15E-09*** 1.85E-09 -1.96E-09 5.91E-09*** 0.101257 t value (-1.330) (-1.255) (0.879) (-2.686) (0.510) (2.824) (1.624) (-1.300) (2.886) Korea -0.282780 2.24E-09 3.65E-09 5.49E-09++ 2.81E-09+++ 6.00E-09** 4.47E-09* -1.09E-09 1.26E-08*** 0.216138 t value (-17.082) (0.807) (1.280) (1.682) (3.360) (2.160) (1.661) (-0.283) (11.420) Malaysia 0.004021 -1.10E-09*** 1.02E-09++ -3.82E-09*** 4.50E-09++ -4.66E-10 7.40E-10** -4.74E-10 5.59E-09*** 0.149593 t value (0.919) (-3.395) (2.488) (-4.596) (2.063) (-1.918) (2.142) (-0.759) (4.384) Mexico -0.048459 1.35E-09+++ 2.73E-09+++ -2.85E-10 3.03E-09++ 3.11E-09*** 2.51E-09*** 1.71E-09*** 2.70E-09*** 0.106369 t value (-7.720) (2.879) (4.482) (-0.320) (2.481) (7.667) (6.396) (4.084) (6.396)

Pakistan -0.078827 -8.93E-10** -8.06E-10 -7.39E-09*** 1.15E-10 4.40E-10 2.12E-09*** 2.12E-09*** 4.06E-09*** 0.470240 t value (-11.799) (-2.143) (-0.927) (-4.603) (0.088) (0.974) (4.563) (5.753) (23.289) Peru 0.006653 -4.51E-09 2.37E-08 -2.93E-07 N/A -8.17E-09 -8.78E-09 -7.02E-09 -3.11E-09 0.002866 t value (1.294) (-0.603) (1.038) (-0.433) N/A (-1.429) (-1.193) (-1.116) (-0.296)

Philippines -0.001291 -3.65E-11 1.77E-10++ 4.38E-11 -7.27E-12 1.26E-11 4.39E-11 3.97E-10*** 1.65E-10 0.079600 t value (-4.515) (-0.889) (2.399) (0.690) (-0.186) (0.308) (1.203) (4.775) (1.594)

Poland -0.008848 -1.33E-08*** 6.58E-09++ 5.54E-09++ 3.31E-10 1.57E-08*** 4.45E-09 1.60E-08*** -3.33E-09 0.243035 t value (-5.178) (-4.122) (2.422) (2.326) (0.085) (4.883) (1.455) (6.243) (-0.887)

Russia 0.059130 -5.13E-09*** 1.21E-09 -9.48E-09*** -1.57E-09 -6.27E-09+++ -1.38E-10 -3.52E-09+++ -4.18E-09+++ 0.069709 t value (5.220) (-5.230) (0.924) (-4.504) (-0.522) (-6.176) (-0.145) (-4.480) (-5.310)

South Africa -0.272488 1.65E-08+++ 1.55E-08+++ 1.82E-08+++ 1.71E-08+++ 1.52E-08*** 1.53E-08*** 1.64E-08*** 1.25E-08*** 0.069770 t value (-8.031) (7.920) (6.110) (5.401) (5.798) (6.791) (6.698) (8.420) (6.122) Taiwan 0.270540 -1.40E09*** -4.39E-11 -3.34E-10 -3.78E-10 -2.08E-09+++ 1.29E-09*** -8.63E-10+ 1.44E-09*** 0.216011 t value (3.579) (-4.080) (-0.115) (-0.578) (-1.338) (-7.300) (3.014) (-1.945) (3.118)

Thailand -0.047909 -4.14E-10** 1.10E-10 -1.77E-10 4.75E-10 7.97E-10*** 3.13E-10** 1.27E-09*** 2.13E-09*** 0.483491 t value (-16.655) (-2.160) (0.326) (-0.311) (0.756) (5.774) (2.161) (5.906) (21.740)

Turkey 0.010593 -8.28E-12*** -5.87E-12** -4.45E-12 -4.30E-12* 2.46E-12 3.73E-12** -4.34E-12+++ 3.34E-12*** 0.172727 t value (1.094) (-4.346) (-2.075) (-1.153) (-1.855) (1.475) (2.281) (-3.464) (5.199) Venezuela -0.00650 1.98E-10 5.01E-11 2.36E-10 1.75E-10 4.12E-10 5.50E-10** -4.45E-10 7.01E-10*** 0.008824 t value (-3.083) (0.622) (0.161) (1.107) (1.998) (1.333) (2.436) (-0.972) (3.521)

When the symbol match to the expectation and significant, the significant levels are as follows: * means 10%, ** means 5%, *** means 1%.

When the symbol doesn’t match to the expectation and significant, the significant levels are as follows: + means 10%, ++ means 5%, +++ means 1%.

These markets are divided into three groups in terms of degree of disposition effect.

According to the definition, disposition effect is to sell winners too early and ride losers too long. Therefore, winners and losers must achieve the statistical significance simultaneously to conform the disposition effect.

1. The Numbers of Significance Level is over 5:

When the numbers of the significance level that match to the expectation is over 5 that indicate the winners and losers exists simultaneously. Therefore, we think that this market have exist the disposition effect. There are three arguments in this condition:

First, stock prices under-react to bad news when more current holders are facing a capital loss, and over-react to good news when more current holders are facing a capital gain. Therefore, they will cause the investors keep the losses and sell the gains.

Second, investors have tendence to loss aversion and regret aversion. Therefore, they don’t want to face the bad news and hold the stocks with capital loss continuously.

Third, investors believe that long-term investing can reduce the risk. That is, investors are impassive for the bad news. This effect is called “Time Diversification³”. But it can’t explain the phenomenon of realized gains.

Those markets include Argentina, Chile, Greece, Hong Kong, Indonesia, Pakistan, Sweden, Thailand, and Turkey.

2. The Numbers of Significane Level is Through 1 to 4:

When the number of the significance level that match to the expectation is between 1 and 4, we think that disposition effect is incomplete. It can be divided into

3 Fisher, K. L., and M. Statman, “A Behavioral Fraamework for Time Diversification”, Accosciation for Investment Management and Research.

two parts. First, when the significance level tends to the winner, we call that

“short-term trading” or “speculative trading”. In other words, whether it produces losses or gains in the short term, investors will sell the stocks. Those markets include Austria, Belgium, Brazil, Canada, China, Denmark, France, Hungary, Ireland, Japan, Mexico, South Africa, Spain, and United Kingdom. Second, when the significance level tends to the loser, we call that “long-term investing”. In other words, whether it produces losses or gains in the short term, investors will hold the stocks, but not to sell. There are no such markets found in this study.

In addition, when the numbers of significance level are between 1 and 4, which some markets neither prone to winner nor prone to loser yet. We think that the disposition effect is incomplete. Those markets include Australia, Czech Republic, Finland, India, Israel, Italy, Korea, Luxembourg, Malaysia, Netherlands, Norway, Philippines, Poland, Portugal, Russia, Singapore, Switzerland, Taiwan, USA, and Venezuela.

3. The Numbers of Significance Level is 0:

When the number of significance level that matches to the expectation is 0, we assert that the disposition effect doesn’t exist. Those markets include New Zealand and Peru.

In addition, we relatively care about USA, United Kingdom, Japan (which are world-wide major stocks markets), Taiwan, China, Korea, Singapore, and Hong Kong (which are Great China Economy Countries). The numbers of significance level of USA is 2, United Kingdom is 4, Japan is 4, Taiwan is 3, China is 4, Korea is 3, Singapore is 3, and Hong Kong is 6. However, among these markets, Hong Kong exists the disposition effect relatively obvious than other markets which the disposition effect is incomplete.

USA, United Kingdom, and Japan are more efficient than other markets, moreover, the disposition effect is incomplete.

Subsequently, because we estimated the disposition effect of weighted price index for each country, which included different sector of stocks, it may cause the disposition effect incomplete and disintegrate. It is why some emerging and speculative markets, such as Taiwan, China, Korea and Singapore, does not exist disposition effect.

Finally, in the Hong Kong, because of the foreign capital flow in and out frequently and rapidly which cause the dispositon effect more stronger.

4.2 Analysis The Disposition Effect Between Developed Markets and Emerging Markets

In this section, we will compare the degree of disposition effect between developed markets and emerging markets. For simplification, we have established a standard for each outcome in all markets in 3.1. Table 4 offer a taxonomy that reflects the degree of disposition effect for developed markets and Table 5 for emerging markets.

Table 4 The Total Score of Developed Markets

Developed Market x=0.1 X=0.075 X=0.05 X=0.025 Total score

Data Source: Collection of this study.

Table 5 The Total Score of Emerging Markets

Emerging Market X=0.1 X=0.075 X=0.05 X=0.025 Total Score

Data Source: Collection of this study.

If the score is greater than 0, it seems that disposition effect is significantly superior to other markets. It includes Argentina, Austria, Brazil, Chile, China, Czech Republic, Indonesia, Ireland, Israel, Japan, Malaysia, Mexico, Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Taiwan, Thailand, Turkey, Greece, Hong Hungary, Kong, Korea, Ireland, Singapore, Sweden, and Venezuela.

When the score is not greater than 0, it seems that the disposition effect is not significant. In other word, we assert that disposition effect does not exist. It includes Australia, Belgium, Canada, Denmark, Finaland, France, India, Italy, Luxembourg, New Zealand, Peru, Russia, South Africa, Switzerland, Spain, United Kingdom, India, and USA.

Overall, the total score of developed markets is 60 and emerging markets is 136.

Therefore, the emerging markets have a greater disposition effect than developed markets obviously under the four kinds of situation. To figure out the reason, in the developed markets, investors are more informed and the markets are more efficient, investors can make the investment decisions more rationally. Comparatively, the emerging markets investors make the investment decisions more irrationally.

Finally, we plot the developed markets that does exist the disposition effect in figure 5 and the emerging markets in figure 6. It is more clear to know the degree of disposition effect among these markets.

Figure 5. The Total Score of Developed Markets

Data Source: Collection of this study.

Figure 6. The Total Score of Emerging Markets

1

Data Source: Collection of this study.

Chapter 5

Conclusions and Suggestions

5.1 Conclusions

This paper uses the methodology derived from Ferris, Haugen and Makhija (1988) to test whether the disposition effect exists in major developed markets and emerging markets, and compare the degree of disposition effect between developed markets and emerging markets. Disposition effect is an important phenomenon of investor behavior. Through the study, we can clearly know whether the investor engaged in his investment rationally or not. Two sections of these findings are worth summarizing:

5.1.1 Results of The Disposition Effect for Each Market

1. The Numbers of Significance Level is over 5:

When the numbers of the significance level that match to the expectation is over 5 that indicate the winners and losers exists simultaneously. Therefore, we think that this market have exist the disposition effect. There are three arguments in this condition:

First, stock prices under-react to bad news when more current holders are facing a capital loss, and over-react to good news when more current holders are facing a capital gain. Therefore, they will cause the investors keep the losses and sell the gains.

Second, investors have tendence to loss aversion and regret aversion. Therefore, they don’t want to face the bad news and hold the stocks with capital loss

continuously.

Third, investors believe that long-term investing can reduce the risk. That is, investors are impassive for the bad news. This effect is called “Time Diversification⁴”. But it can’t explain the phenomenon of realized gains.

Those markets include Argentina, Chile, Greece, Hong Kong, Indonesia, Pakistan, Sweden, Thailand, and Turkey.

2. The Numbers of Significane Level is Through 1 to 4:

When the number of the significance level that match to the expection is between 1 and 4, we think that disposition effect is incomplete. It can be divided into two parts. First, when the significance level tends to the winner, we call that

“short-term trading” or “speculative trading”. In other words, whether it produces losses or gains in the short term, investors will sell the stocks. Those markets include Austria, Belgium, Brazil, Canada, China, Denmark, France, Hungary, Ireland, Japan, Mexico, South Africa, Spain, and United Kingdom. Second, when the significance level tends to the loser, we call that “long-term investing”. In other words, whether it produces losses or gains in the short term, investors will hold the stocks, but not to sell. There are no such markets found in this study.

In addition, when the numbers of significance level are between 1 and 4, which some markets neither prone to winner nor prone to loser yet. We think that the disposition effect is incomplete. Those markets include Australia, Czech Republic, Finland, India, Israel, Italy, Korea, Luxembourg, Malaysia, Netherlands, Norway, Philippines, Poland, Portugal, Russia, Singapore, Switzerland, Taiwan, USA, and Venezuela.

3. The Numbers of Significance Level is 0:

4 Fisher, K. L., and M. Statman, “A Behavioral Fraamework for Time Diversification”, Accosciation for Investment Management and Research.

When the number of significance level that matches to the expectation is 0, we assert that the disposition effect doesn’t exist. Those markets include New Zealand and Peru.

In addition, we relatively care about USA, United Kingdom, Japan (which are world-wide major stocks markets), Taiwan, China, Korea, Singapore, and Hong Kong (which are Great China Economy Countries). The numbers of significance level of USA is 2, United Kingdom is 4, Japan is 4, Taiwan is 3, China is 4, Korea is 3, Singapore is 3, and Hong Kong is 6. However, between these markets, Hong Kong exists the disposition effect relatively obvious than other markets which the disposition effect is incomplete.

USA, United Kingdom, and Japan are more efficient than other markets, moreover, the disposition effect is incomplete.

Subsequently, because we estimated the disposition effect of weighted price index for each country, which included different sector of stocks, it may cause the disposition effect incomplete and disintegrate. It is why some emerging and speculative markets, such as Taiwan, China, Korea and Singapore, does not exist disposition effect.

Finally, in the Hong Kong, because of the foreign capital flow in and out frequently and rapidly which cause the dispositon effect more stronger.

5.1.2 Results of The Disposition Effect Between Developed Markets and Emerging Markets

We calculate the total score of significance level in all markets, the total score of developed markets is 60 and emerging markets is 136. Emerging markets are also stronger degree of disposition effect than developed markets. To figure out the reason, in the developed markets, investors are more informed and the markets are more efficient, investors can make the investment decisions more rationally. Comparatively, the emerging

markets investors make the investment decisions more irrationally.

5.2 Suggestions

5.2.1 For Investors

Before carrying out the investment activity, the investors must plan to avoid occurring the irrational behavior. Barber, and Odean (2000) found that people are overconfident, and overconfidence lead to too much trading. Overconfident investors will overestimate the value of their private information, causing them to trade too actively and, consequently, to earn below-average returns. In order to avoid the loss, when investors trade the security, they must set the “stop order”. That is to say, an order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limit the investors’ loss or locking in his or her profit.

5.2.2 For Further Research

First, there are more psychological theories extended by propect theory, which are related to each other. Therefore, further research can combine disposition effect with other theories to test the investors behavior.

Second, disposition effect may exists not only in stock market but also in futures markets. Therefore, future study can focus on other financial markets to test whether the disposition effect exists or not.

Finally, because of the limitations of data collection, we use the developed markets and emerging markets list in MSCI as the global samples to test the disposition effect. If further researchers can challenge this questions to compare the difference among

worldwide markets, it will makes the disposition effect research more intact.

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