The Effect of Momentum on the Disposition Effect and Expected Stock Returns in the Framework of Prospect Theory and Mental Accounting Theory

Subject Areas : Investments

Mahshid  Allami ¹ (Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran)
Afsane  Soroshyar ² (Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran)

Received: 2021-08-18 Accepted : 2022-02-20 Published : 2022-02-20

Keywords: Momentum, Prospect Theory, Mental Accounting, Disposition Effect, Expected Stock Returns,

Abstract :

The purpose of this study was to investigate the effect of momentum on the disposition effect and expected stock returns in the framework of the prospect theory of Kahneman and Tversky (1979) and the mental accounting theory of Thaler (1985). The statistical population of this research included all companies incorporated in Tehran Stock Exchange between 2008 and 2019 from which102 companies were selected as the sample using the systematic elimination method. Multiple regressions were used to test the hypotheses of the research. The results of testing the research hypotheses indicated that momentum influenced the disposition effect. Another result showed that momentum affects the expected stock returns. Moreover, after controlling the disposition effect, the impact of momentum on the expected stock returns was reduced. In other words, the short-term, medium-term and long-term momentum coefficients are lower when the disposition effect is controlled, which means that by controlling the inclination effect of stocks, the momentum effect on the expected stock decreases

References:

بزرگ اصل، موسی؛ صاحبقرانی، امیر عباس. (1391). پیشبینی بازده غیرعادی بر مبنای مدل مبتنی بر شتاب سود و صنعت در بورس اوراق بهادار تهران. مطالعات تجربی حسابداری مالی، 10(38)، 67-53.

بیات، مرضیه؛ قادری، نرمین. (1395). قیمت مرجع و اثرات حسابداری ذهنی بر عملکرد سرمایه گذاران. دانش حسابداری و حسابرسی مدیریت، 5(19)، 104-89.

خواجوی، شکراله؛ فعال قیومی، علی. (1394). نظریه دورنما تجمعی و بازده مورد انتظار سهام در بورس اوراق بهادار تهران. دانش مالی تحلیل اوراق بهادار، 8(27)، 95-83.

صفری، علی؛ آشنا، محمد. (1398). ارائه مدلی بهینه برای انتخاب سهام براساس استراتژی معاملاتی مومنتوم. دانش مالی تحلیل اوراق بهادار، 12(41)، 153-143.

کیان، علیرضا؛ پورحیدری، امید؛ کامیابی، یحیی. (1396). بررسی تأثیر حسابداری ذهنی بر رفتار سرمایه‌گذاران از دیدگاه گزارشگری مالی. پژوهش های حسابداری مالی، 9(2)، 22-1.

موسوی شیری، محمود؛ صالحی، مهدی؛ شاکری، مریم؛ بخشیان، عسل. (1394). سودآوری استراتژی مومنتوم و تاثیر حجم معاملات سهام بر آن در بورس اوراق بهادار تهران. مهندسی مالی و مدیریت اوراق بهادار، 6(25)، 124-107.

Asness, C. S., Moskowitz, T. J., & Pedersen, L. H. (2013). Value and Momentum Everywhere. The Journal of Finance, 68(3), 929–985.

Barberis, N., & Huang, M. (2001). Mental Accounting, Loss Aversion, and Individual Stock Returns. The Journal of Finance, 56(4), 1247–1292.

Barberis, N., & Xiong, W. (2009). What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation. The Journal of Finance, 64(2), 751–784.

Bayat, M., Ghaderi, N. (2016). Reference prices and the effects of mental accounting on investment performance. Journal of Management Accounting and Auditing Knowledge, 5(19), 89-104. [In Persian].

Bozorge Asl, M., Sahebgharani, A. (2012). Prediction of abnormal return according profit and industry momentum model in Tehran stock exchange. Empirical Studies in Financial Accounting, 10(38), 53-67. [In Persian].

Cao, X. (2010). Disposition effect and momentum based on prospect theory/mental accounting in the Chinese stock markets. Openrepository.aut.ac.nz.

Chui, A. C. W., Titman, S., & Wei, K. C. J. (2010). Individualism and Momentum around the World. The Journal of Finance, 65(1), 361–392.

Dierick, N., Heyman, D., Inghelbrecht, K., & Stieperaere, H. (2019). Financial attention and the disposition effect. Journal of Economic Behavior & Organization, 163, 190–217.

Frazzini, A. (2006). The Disposition Effect and Underreaction to News. The Journal of Finance, 61(4), 2017–2046.

Grinblatt, M., & Han, B. (2002). The Disposition Effect and Momentum. National Bureau of Economic Research.

 Grinblatt, M., & Han, B. (2005). Prospect theory, mental accounting, and momentum. Journal of Financial Economics, 78(2), 311–339.

Hon, M. T., & Tonks, I. (2003). Momentum in the UK stock market. Journal of Multinational Financial Management, 13(1), 43–70.

Hsu, C. C., & Chien, F. (2020). The Impact of Anchoring Bias on the Profitability of Time-Series Momentum. Revista Argentina de Clínica Psicológica, 29(4), 161.

‌Jegadeesh, N., & Kim, W. (2006). Value of analyst recommendations: International evidence. Journal of Financial Markets, 9(3), 274–309.

Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65–91.

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–292.

Kaustia, M. (2010). Prospect Theory and the Disposition Effect. Journal of Financial and Quantitative Analysis, 45(3), 791–812.

Khajavi, S., Faal Ghayoumi, A. (2015). Cumulative Prospect Theory and Expected Return in Tehran Security Exchange. Financial Knowledge of Securities Analysis, 8(27), 83-95. [In Persian].

Kian, A., pourheydari, O., Kamyabi, Y. (2017). The Impact of Mental Accounting on the Investor’s Behavior: Financial Reporting Perspective. Journal of Financial Accounting Research, 9(2), 1-22. [In Persian].

Kong, L. L., Bai, M., & Wang, P. (2015). Is disposition related to momentum in Chinese market? Managerial Finance, 41(6), 600–614.

Mosavi Shiri, M. Salehi, M. Shakeri, M. Bakhshian, A. (2015). Profitability of momentum strategy and the effect of stock trading volume on it in Tehran Stock Exchange, Financial Engineering and Portfolio Management, 6(25), 107-124. [In Persian].

Sadhwani, R., & Bhayo, M. U. R. (2021). Momentum and disposition effect in the US stock market. Cogent Economics & Finance, 9(1).

Safari, A., Ashna, M. (2019). Proposing an optimal model for stock selection based on the momentum trading strategy. Financial Knowledge of Securities Analysis, 12(41), 143-153. [In Persian].

Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. The Journal of Finance, 40(3), 777–790.

Shumway, T., & Wu, G. (2006). Does Disposition Drive Momentum? Papers.ssrn.com.

Thaler, R. (1985). Mental Accounting and Consumer Choice. Marketing Science, 4(3), 177–266.