Momentum and Disposition Effect in the Frontier Market in Sri Lanka

This study aims to investigate whether the disposition effect leads to momentum in stock returns. The researcher identifies two sub-periods: from 2015 to 2018, before the economic crisis, and from 2019 to 2022, during the economic crisis. The results indicate that a higher capital gain overhang is associated with lower momentum returns both before and during the economic crisis. Therefore, the disposition effect was negatively related to momentum returns before the economic crisis (2015-2018), during the economic crisis (2019-2022), and throughout the entire period considered by the researcher (2015-2022), and this relationship was statistically significant. The study aims to provide investors with a framework to enhance their trading strategies and portfolio performance. Understanding this link empowers investors to capitalise on behavioural inefficiencies, potentially gaining an edge through timing mechanisms that anticipate momentum-driven movements.