Selling Winners and Losers: Discovery of New Disposition Effect in Korea

Abstract

A new disposition effect refers to a tendency of investors to sell both winner and loser stocks, rather than to sell winner and hold loser stocks. This study investigates the asset pricing implications of the new disposition effect in the Korean stock markets. I find that stocks with either large unrealized gains or losses earn higher future returns than otherwise similar stocks do. This finding supports the hypothesis that stocks with larger unrealized gains and losses experience higher selling pressure that pushes down their price temporarily and their reversals to fundamentals lead to higher subsequent returns.