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Proximity to the 52-week high and the risk-return trade-off

Author

Listed:
  • Chen, Xingyu
  • Chen, Zilin
  • Tu, Jun
  • Wang, Liyao
  • Wang, Luying

Abstract

Traditional asset pricing theory suggests a positive risk-return relationship, while empirical studies often find a negative association between risk and expected returns. In this paper, we uncover a unique pattern: a negative risk-return relationship among stocks far from their 52-week high prices and a positive relationship among stocks close to their 52-week high prices. We propose that this cross-sectional heterogeneity arises because investors evaluate stocks relative to the 52-week high, becoming risk-seeking when prices are far below this benchmark and risk-averse when prices are near it. We explore various potential explanations for this phenomenon but find no empirical support. Overall, our findings introduce a novel psychological perspective for understanding the risk-return trade-off.

Suggested Citation

  • Chen, Xingyu & Chen, Zilin & Tu, Jun & Wang, Liyao & Wang, Luying, 2026. "Proximity to the 52-week high and the risk-return trade-off," Journal of Economic Dynamics and Control, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:dyncon:v:185:y:2026:i:c:s0165188926000321
    DOI: 10.1016/j.jedc.2026.105286
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    Keywords

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    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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