Industry Information and the 52-Week High Effect

51 Pages Posted: 23 Mar 2011 Last revised: 13 Mar 2012

Xin Hong

University of Kentucky

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Date Written: October 15, 2011

Abstract

We find that the 52-week high effect (George and Hwang, 2004) cannot be explained by risk factors. Instead, it is more consistent with investor underreaction caused by anchoring bias: the presumably more sophisticated institutional investors suffer less from this bias and buy (sell) stocks close to (far from) their 52-week highs. Further, the effect is mainly driven by investor underreaction to industry instead of firm-specific information. The extent of underreaction is more for positive than for negative industry information. A strategy that buys stocks in industries in which stock prices are close to 52-week highs and shorts stocks in industries in which stock prices are far from 52-week highs generates a monthly return of 0.60% from 1963 to 2009, roughly 50% higher than the profit from the individual 52-week high strategy in the same period. The 52-week high strategy works best among stocks with high R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). Furthermore, our industry 52-week high effect is more pronounced among firms with less informative prices, exactly the type of firm on which investors are more likely to suffer from the anchoring bias. Our results hold even after controlling for both individual and industry return momentum effects.

Keywords: 52-week high effect, momentum, anchoring bias

JEL Classification: G11, G12

Suggested Citation

Hong, Xin and Jordan, Bradford D. and Liu, Mark H., Industry Information and the 52-Week High Effect (October 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787378 or http://dx.doi.org/10.2139/ssrn.1787378

Xin Hong

University of Kentucky ( email )

Lexington, KY 40506
United States

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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