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Buy High and Sell Low

42 Pages Posted: 26 Mar 2008 Last revised: 10 Jan 2011

Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management

Date Written: January 9, 2011


Motivated by range-related trading practices, this paper investigates the return-predictive role of relative price level. As the price of a stock moves to an unusually high or low level with respect to a long-term trading range, concern about mean-reversion in the price becomes important. I test this hypothesis using a mean-reversion-based measure to proxy for the relative price level. Tests show that the measure is a significant and robust predictor of cross-sectional variation in stock returns. The results suggest that in the presence of uncertainty about duration of firm-specific shocks, deviation from a perceived range makes investors conservative, which creates abnormal performance of a "buy high and sell low'' portfolio strategy. The relative price level effect is not driven by small-cap stocks and it is not a manifestation of momentum, reversal, the 52-week high, and volatility effects.

Keywords: Relative price level, mean-reversion, trading range, investor conservatism, underreaction, technical analysis

Suggested Citation

Wang, Kevin Q., Buy High and Sell Low (January 9, 2011). Available at SSRN: or

Kevin Q. Wang (Contact Author)

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
416 946 5059 (Phone)
416 971 3048 (Fax)

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