This paper studies the impact of the disposition effect on the return predictability before and during the global financial crisis periods. It uses data of 104 French financial institutions’ stocks over the period January 2001-December 2009. To construct behavioral factor, the capital gain-related proxy of Grinblatt and Han (2005) is estimated. The study of the cross-sectional determinants of this factor indicates a significantly positive impact of past return at short and intermediate horizons on the unrealized capital gains. The empirical analysis of the link between disposition effect and excepted return, after controlling for market anomalies, particularly size, momentum and reversals, shows a significantly positive cross-sectional relation between a stock’s unrealized capital gains and its expected returns during the tranquil period. Moreover, momentum and reversal effects, mainly documented in French market, disappear when the disposition effect is controlled for. Further, during global financial crisis period, the presence of disposition investors does not influence the expected return.

An important challenge for behavioral finance is to find a direct relation between individual investor’s behavior and asset price dynamics. Recently, several studies indicate that large number of investors behave irrationally and are prone to behavioral heuristics that lead to suboptimal investment choices. One of the most striking irrational patterns in the financial markets is the tendency of some investors to sell winner stocks too early and keep the losers too long. Shefrin and Statman (1985) label this evidence the disposition effect. This effect is a well-established phenomenon in the empirical and experimental financial literature.

Odean (1998) examines the trading records of 10,000 investors over a 6-year period at a national level discount brokerage firm in the US. He shows that winners are sold at roughly twice the rate of losers and shows that this phenomenon is not explained by taxes, rebalancing, or transaction costs.

Based on data similar to Odean (1998), Feng and Seasholes (2005) examine the stock trading data of individual clients of a national brokerage house in People’s Republic of China. They find that Chinese investors exhibit a disposition effect. This finding is also validated by Chen et al. (2007) in the same context.

Goetzmann and Massa (2003) show that a disposition trade between disposition-prone investors and their counterparties explains cross-sectional differences in daily returns.

Financial Risk Management Journal, Discounted Cash Flow, DCF, Net Present Value, NPV, DCF Techniques, Monte-Carlo Simulation Method, Cyprus Telecommunications Authority, CYTA, Information Technology, IT, Methodological Issues, Cash Flow, Weighted Average Cost of Capital, WACC, Decision Making.