Capital Gains Overhang and Investor Risk Preferences in Chinese Equities

Summary

This report applies behavioral finance to equity factor research, using the disposition effect and prospect theory to explain how investors' risk preferences may differ depending on whether they hold gains or losses. It constructs a capital gains overhang measure from a turnover-weighted average transaction price over the preceding 100 days, then sorts constituents of the CSI 500 and CSI 800 by that measure. The report finds that low-overhang portfolios outperform high-overhang portfolios and describes a layered strategy that uses amplitude in the high-overhang group and market capitalization in the low-overhang group.

For CSI 500 constituents, it reports historical excess-return and risk-adjusted statistics for both the low-overhang portfolio and the layered strategy, including results after transaction costs for the former. These are backtested findings, not evidence of future performance. The authors explicitly warn that changing market conditions may invalidate historical patterns and that investors should account for their own objectives and views.

Key ideas

• The report links the disposition effect to investors selling winning positions while retaining losing ones.
• Capital gains overhang is estimated using a turnover-weighted reference price based on recent trading.
• Low-overhang stocks are reported to outperform high-overhang stocks in the studied Chinese indexes.
• A layered screen applies amplitude in the high-overhang group and market capitalization in the low-overhang group.
• Reported performance is historical and may not persist under different market conditions.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.