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 , Afsane Soroshyar ²

1 - Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran
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

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