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Review of Quantitative Finance and Accounting

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25.02.2023 | Original Research

Fundamental strength and the 52-week high anchoring effect

verfasst von: Zhaobo Zhu, Licheng Sun, Min Chen

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 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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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.

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.

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.

Our results are robust to the use of these variables in untransformed format.

For example, please see Yu and Yuan (2011) and Stambaugh, Yu, and Yuan (2012).

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Titel: Fundamental strength and the 52-week high anchoring effect
verfasst von: Zhaobo Zhu
Licheng Sun
Min Chen
Publikationsdatum: 25.02.2023
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2023
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-023-01138-3

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