Disposition effect at the market level: evidence from Indian stock market Sravani Bharandev and Sapar Narayan Rao Shailesh J. Mehta School of Management, Indian Institute of Technology Bombay, Mumbai, India Abstract Purpose – The purpose of this paper is to test the disposition effect at market level and propose an appropriate reference point for testing disposition at market level. Design/methodology/approach – This is an empirical study conducted on 500 index stocks of NSE500 (National Stock Exchange). Winning and losing days for each stock are calculated using 52-week high and low prices as reference points. To test disposition effect, abnormal trading volumes of stocks are regressed on their percentage of winning (losing) days. Further using ANOVA, the difference between mean of percentage of winning (losing) days of high abnormal trading volume deciles and low abnormal trading volume deciles is tested. Findings – Results show that a stock’s abnormal trading volume is positively influenced by the percentage of winning days whereas percentage of losing days show no such effect. Findings are consistent even after controlling for volatility and liquidity. ANOVA results show the presence of high percentage of winning days in higher deciles of abnormal trading volumes and no such pattern in case of losing days confirms the presence of disposition effect. Further an ex post analysis indicates that disposition prone investors accumulate losses. Originality/value – This is the first study, which proposes the use of 52-week high and low prices as reference points to test the market-level disposition effect. Findings of this study enhance the limited literature available on disposition effect in emerging markets by providing evidence from Indian stock markets. Keywords Reference point, Disposition effect, 52-week high price, 52-week low price, Abnormal trading volume Paper type Research paper 1. Introduction The tendency of the investors to realize gains early and postpone losses is termed as the disposition effect (Shefrin and Statman, 1985). In the last three decades, this phenomenon has been studied widely. Using experimental, empirical- and survey-based methods, the literature has established the presence of disposition effect among investors. The cause of the disposition effect can be explained by the prospect theory (Kahneman and Tversky, 1979). As per the prospect theory, an investor’s notion of risk is determined by a reference point. While the investors are risk averse in the domain of the gains, they seek risk in the domain of losses. Previous research suggests that the purchase price, the price point at which investor bought an asset, can be employed as a reference point. In their seminal work, Weber and Camerer (1998) conducted an experimental study to showcase the presence of disposition effect by using the prospect theory. Further, Odean (1998), Lehenkari and Perttunen (2004) and Frazzini (2006) tested and confirmed the presence of disposition effect at individual investor level. Given the fact that the prospect theory deals with behavior of the individuals, and the theory has been often tested at the individual level (Lehenkari and Perttunen, 2004). But it can be argued that since the aggregate actions of the individuals constitute the entire market, disposition effect should be tested at the market level as well (Kaustia, 2004). One of the key challenges in testing disposition effect at the market level is deciding the appropriate reference point. Unlike individual level studies where the purchase price often Review of Behavioral Finance Vol. 12 No. 2, 2020 pp. 69-82 © Emerald Publishing Limited 1940-5979 DOI 10.1108/RBF-12-2018-0132 Received 27 December 2018 Revised 5 May 2019 Accepted 13 May 2019 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/1940-5979.htm 69 Disposition effect at the market level