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Published in: Review of Quantitative Finance and Accounting 4/2023

25-02-2023 | Original Research

Fundamental strength and the 52-week high anchoring effect

Authors: Zhaobo Zhu, Licheng Sun, Min Chen

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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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.

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Appendix
Available only for authorised users
Footnotes
1
An unreported table shows consistent results hold for 1-month holding period. For example, when the holding period is 1-month, the raw return, FF3-, FF4-, and FF5-adjusted returns for the consistent PTH-FSCORE are 1.60% (t-statistic = 4.68), 1.93% (t-statistic = 7.71), 1.14% (t-statistic = 5.88), and 1.36% (t-statistic = 4.08), respectively; the raw return, FF3-, FF4-, and FF5-adjusted returns for the inconsistent PTH-FSCORE are 0.15% (t-statistic = 0.58), 0.52% (t-statistic = 2.08), -0.16% (t-statistic = − 0.74), and 0.33% (t-statistic = 0.94), respectively.
 
2
The consistent PF portfolio refers to the fundamental-consistent 52-week high (PTH) strategy, and the inconsistent PT portfolios refers to the fundamental-inconsistent PTH strategy in tables.
 
3
Fama and French (2008) emphasize that both the portfolio and regression approaches have their own strength and weakness. They find that these two approaches are complementary to each other.
 
4
Our results are robust to the use of these variables in untransformed format.
 
5
For example, please see Yu and Yuan (2011) and Stambaugh, Yu, and Yuan (2012).
 
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Metadata
Title
Fundamental strength and the 52-week high anchoring effect
Authors
Zhaobo Zhu
Licheng Sun
Min Chen
Publication date
25-02-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01138-3

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