Dynamic Asset Pricing Driven by Reference Prices and the Disposition Effect: Empirical Evidence from CSI 300 Constituent Stocks

Abstract

Based on the framework of Prospect Theory and Mental Accounting, this paper constructs the Capital Gains Overhang (CGO) indicator using the 52-week high price as a reference price anchor to investigate how investor disposition effect influences the dynamic pricing mechanism of A-share market. Using the inventory data of CSI 300 from June 2021 to May 2024, we find that: (1)CGO is positively correlated with future returns, and the portfolio with high CGO (high unrealized income) is obviously better than the portfolio with low CGO (high unrealized cost), which verifies the hypothesis of “overreaction caused by disposition effect”; (2) The permutation effect (DE) plays an important mediating role in the return relationship of CGO, and the indirect effect accounts for 221.15% of the total effect (bootstrap 95% CI: [-0.002891,-0.000186]); (3) The volatility of the high CGO group is obviously lower than that of the low CGO group, which indicates that the allocation effect has asymmetric influence on the market stability. This study provides empirical evidence for China’s market behavior asset price theory and practical significance for the design of quantitative investment strategy.