Prior findings on the disposition effect are derived from data sets which mostly cover boom periods. However, since the drivers of the disposition effect (preferences and beliefs of investors) tend to behave countercyclically, it is crucial to study entire market cycles. We use individual investor trading data from Germany covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, being higher during busts than booms. Investors are 26% more likely to realize gains in market downturns. Changes in investors’ selling behavior can be linked to changes in risk aversion and beliefs across financial market cycles.
SAFE Working Paper No. 305
