State-dependent psychological anchors and momentum

Rong Ran, Cheng Li, Kuan-Cheng Ko and Nien-Tzu Yang

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: George and Hwang (2004) show that momentum occurs because investors are anchored by the 52-week high when making investment decisions. In this paper, we propose that investors’ anchoring bias is state-dependent that varies with the level of the 52-week high. Using the ratio of 52-week high to historical high to capture the state-dependent nature of anchoring biases, we show that price momentum and 52-week high momentum generate significant profits only when the stock's 52-week high approaches its historical high. When the 52-week high is far from the historical high, both strategies exhibit no momentum profit.

Keywords: Anchoring biases; 52-week-high; Historical high; Momentum (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004256

DOI: 10.1016/j.frl.2021.102436

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