Investigating the Effect of Reference Price Distribution Variables on Expected Stock Return

The purpose of this research is to investigate the role of reference price distribution variables (Mean, Variance, Skewness and Kurtosis) on predictability of stock’s expected return, under the impact of disposition effect. The sample includes those stocks accepted in Stock Exchange of Tehran, 2006-2010. Hypotheses are tested, employing OLS method and t-student test. Results show that reference price distribution variables play an important role in prediction of stock’s expected return. For stocks with positive average capital gains, the Mean of capital gains is the key explanatory variable of stock’s expected return, i.e. the more Mean of capital gains is, the more stock’s expected return over the next period. Whereas the Skewness is for those with negative average capital gains, i.e. the more Skewness of capital gains is, the more stock’s expected return over the next period.