Another look at anchoring and stock return predictability

Ajay Bhootra

Finance Research Letters, 2018, vol. 25, issue C, 259-265

Abstract: The superior performance of a momentum strategy long in stocks trading near their 52-week high prices and short in stocks trading far from their 52-week high prices is well-documented. In contrast, recent research finds that a similar strategy based on historical high prices exhibits subsequent reversals instead. This paper shows that after excluding low-priced stocks and/or January returns from the sample, the stocks trading near their historical high prices, in fact, exhibit significant outperformance. In particular, in a sample without low-priced stocks, a strategy long in 10% of the stocks with prices nearest to their historical high prices and short in 10% of the stocks with prices furthest from their historical high prices earns an average monthly return of 0.93% in non-January months. The performance of 52-week high momentum strategy also improves significantly upon exclusion of low-priced stocks and/or January returns. These findings have important implications for the anchoring-based behavioral explanations of these return patterns.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:25:y:2018:i:c:p:259-265

DOI: 10.1016/j.frl.2017.11.002

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