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How prior realized outcomes affect portfolio decisions

Lookup NU author(s): Professor Darren DuxburyORCiD, Professor Robert Hudson


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Investors have been shown to have particular preferences when it comes to the characteristics of stock they hold in their portfolios, while prior gains and losses have been shown to impact on individuals’ economic decisions, both in an investment context and more widely. This paper is the first to investigate how prior gains and losses affect investors’ preferences for particular stock characteristics and so shape their portfolio compositions. Using a rich dataset combination from China, we conclude that prior realized outcomes play an important role in shaping portfolio composition through their impact on the characteristics of stocks that investors choose to hold. We find that positive prior realized outcomes encourage investors to select stocks with a variety of characteristics broadly consistent with higher risk taking (for example, higher betas and higher levels of idiosyncratic risk), though there are some differences across investor classes. While our empirical results are in line with what one would expect from the existing literature on the disposition and house money effects, we also consider other possible interpretations of the results.

Publication metadata

Author(s): Duxbury D, Hudson R, Keasey K, Yang Z, Yao S

Publication type: Article

Publication status: Published

Journal: Review of Quantitative Finance and Accounting

Year: 2013

Volume: 41

Issue: 4

Pages: 611-629

Print publication date: 30/10/2012

ISSN (print): 0924-865X

ISSN (electronic): 1573-7179

Publisher: Springer New York LLC


DOI: 10.1007/s11156-012-0325-9


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