Fundamental Strength and the 52-Week High Anchoring Effect

Zhaobo Zhu (1) , Licheng Sun (2) , Min Chen (3)

1 Audencia Business School
2 ODU - Old Dominion University [Norfolk]
3 SFSU - San Francisco State University

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.

Keywords: Anchoring Bias; Underreaction; 52-week High; Fundamental Strength

Domains: Quantitative Finance [q-fin]

Zhaobo Zhu, Licheng Sun, Min Chen. Fundamental Strength and the 52-Week High Anchoring Effect. Review of Quantitative Finance and Accounting, 2023, 60 (4), pp.1515-1542. ⟨10.1007/s11156-023-01138-3⟩. ⟨hal-04086076⟩