The Use of Conditional Orders and the Disposition Effect in Stock Market

This paper examines the impact of conditional order usage on the disposition effect. Taking advantage of proprietary Australian stock brokerage data, we employ the propensity score method to create a control group. This methodology enables us to isolate the impact of conditional orders from other confounding factors that influence the disposition effect, which remains unsolved in existing empirical research. Our study adds to existing disposition effect studies robust empirical evidence of conditional orders’ causal effect. We find that conditional orders reduce the disposition effect by both increasing the sale of losers and decreasing the sale of winners. This study also complements the literature with realised and paper return differences between conditional order users and non-users. At the same time, we document that disposition effect, while can be significantly reduced, cannot be eliminated completely with known strategies. Our finding sheds more light on existing theories that have been used to explain the disposition effect, and provides support to the prospect theory.