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Fundamental strength and the 52-week high anchoring effect

Author

Listed:
  • Zhaobo Zhu

    (Shenzhen University)

  • Licheng Sun

    (Strome College of Business, Old Dominion University)

  • Min Chen

    (San Francisco State University)

Abstract

When stocks are trading near their 52-week high investors tend to have low expectation about their future returns. We contrast such expectations against firms’ fundamental strength. For firms with strong fundamentals, we confirm that investors’ expectations are too low, which is consistent with the hypothesis that the 52-week high acts as a psychological anchor. We report that a fundamental-strength enhanced 52-week high trading strategy significantly outperform the unconditional strategy by nearly doubling its average return. Moreover, we provide interesting evidence that this anomalous effect is most evident when investor sentiment is high, but absent among more sophisticated institutions and short sellers.

Suggested Citation

  • Zhaobo Zhu & Licheng Sun & Min Chen, 2023. "Fundamental strength and the 52-week high anchoring effect," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1515-1542, May.
    • Handle: RePEc:kap:rqfnac:v:60:y:2023:i:4:d:10.1007_s11156-023-01138-3
    DOI: 10.1007/s11156-023-01138-3
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    2. Zhaobo Zhu & Licheng Sun, 2024. "When Buffett Meets Bollinger: An Integrated Approach to Fundamental and Technical Analysis," Post-Print hal-04703041, HAL.

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    More about this item

    Keywords

    Anchoring bias; Underreaction; 52-week high; Fundamental strength;
    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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