| Summary: | Investors seem to hold their losing stocks to a greater extent than they hold their winning stock. This well documented behavioral irregularity is termed disposition effect. This paper examines the presence of disposition effect in mutual fund investors of Pakistan for the period of 2010 to 2017. Subsequently, we explore disposition effect from two aspects. Firstly, we examine the influence of risk propensity on disposition effect by segmenting the funds into risk categories. Secondly, we examine how disposition effect varies across market states by segregating the sample period into neutral, bear and bull periods. The findings suggest that Pakistani mutual fund investors are disposition prone in their trading decisions. Furthermore, the disposition effect varies with level of risk; investors show weaker disposition tendencies in higher risk funds and stronger disposition tendencies in lower risk funds. Moreover, our results suggest that investors are disposition prone under the bull and bear market and show stronger disposition tendencies under the bear market. Conversely, when the market is neutral, investors are not disposition prone in their trading behavior. The findings of this study provide important implications for the making of sound and integrative theoretical frameworks, portfolio optimization methods and risk management strategies.
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