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One of the latest additions to the GSB faculty, Andrea Frazzini will have his PhD thesis published in the prestigious Journal of Finance. According to an article in SmartMoney magazine, this is “like winning a Pulitzer for your college history exam.”
The article by Frazzini, an assistant professor of finance, entitled "The Disposition Effect and Under-Reaction to News” will appear in the Winter 2005 issue of the Journal of Finance. The journal is the most widely cited academic publication on finance.
As explained in the SmartMoney article, investors tend to be averse to admitting they made a mistake and hold onto losers. More often, they sell winners since it allows them to celebrate their success.
Frazzini looked at mutual funds trades which allowed him to obtain average purchase prices for stocks. When it comes to good news about a stock, Frazzini’s theory is to buy, not sell—when others are—if the current price is higher than the average. The opposite holds true for bad news—sell when others are refusing to sell. Following this aspect of Frazzini’s research, an investor might beat the market by as much as 12 points. Frazzini’s work validates the common investment advice, “don’t fight the tape.”
The paper also won the 11th annual academic competition of the Chicago Quantitative Alliance. The CQA is a professional organization for quantitative fund managers.
The original article in SmartMoney appeared on August 1, 2005. The research was also covered in the Hindu Business Line.