Risk Propensity of Investors in Unrealized Capital Losses

The disposition effect occurs when investors hold unrealized loss assets for too long and sell unrealized profit assets too quickly. However, some studies argue that investors tend to be risk-averse in the area of unrealized capital losses. We confirm that these two views of the disposition effect appear simultaneously in the stock market. We also confirm that changes in disposition effects due to the degree of liquidity are related to firm size, volatility, and lottery-like stocks. Our findings suggest that investors have a risk-averse propensity for highly illiquid assets in unrealized loss areas and follow the flow of liquid investors through non-informal transactions. Consequently, it is confirmed that an overreaction occurs in unrealized capital loss, and the disposition effect is reversed