Is Disposition Related to Momentum in Chinese Market

This study empirically examines the applicability of the Grinblatt and Han (2005) model for analyzing the relationship between the disposition effect and momentum in the Chinese stock market by testing the three hypotheses implied by their model. Our results show that unrealized capital gains are positively associated with past returns, which provides evidence supporting the first hypothesis. However, our findings also show that the unrealized capital gains are negatively related to the expected returns, which contradicts the second hypothesis. Conversely, this result is consistent with many previous studies on the disposition effect (e.g., Barberis et al. 2001; Barberis and Xiong 2009). Furthermore, we find evidence for an intermediate horizon momentum effect in the Chinese stock market when the unrealized capital gains are controlled for, which is contrary to the third hypothesis that the momentum effect is driven by the disposition effect. This implies that the momentum effect in the Chinese stock market is probably associated with other factors such as heterogeneous investor beliefs rather than preference. Finally, our findings are robust for different sample periods and the discrepancies in the findings between the Chinese and US stock markets are not due to different sample periods. Therefore, our findings imply that the model of Grinblatt and Han (2005) may not exactly describe the relationship between the disposition effect and momentum in the Chinese stock market.