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State-dependent psychological anchors and momentum

Author

Listed:
  • Ran, Rong
  • Li, Cheng
  • Ko, Kuan-Cheng
  • Yang, Nien-Tzu

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.

Suggested Citation

  • Ran, Rong & Li, Cheng & Ko, Kuan-Cheng & Yang, Nien-Tzu, 2022. "State-dependent psychological anchors and momentum," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004256
    DOI: 10.1016/j.frl.2021.102436
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    More about this item

    Keywords

    Anchoring biases; 52-week-high; Historical high; Momentum;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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