Anchoring Bias and Value Strategy

41 Pages Posted: 24 Apr 2011 Last revised: 29 May 2012

See all articles by Li-Wen Chen

Li-Wen Chen

National Chung Cheng University

Hsin-Yi Yu

University of Edinburgh - Organisation Studies; National University of Kaohsiung; University of Edinburgh - Accounting and Finance

Date Written: May 29, 2012

Abstract

Value strategies purchase stocks that have high fundamental values relative to prices. The interpretation of why value strategies outperform is controversial. Based on the fact that investors may rely too heavily, or “anchor,” on one piece of information when making investment decisions, this study shows that value strategies can yield higher returns by exploiting anchoring bias, and that the risk premium is also tripled. The returns cannot be rationalized with a variety of factor models. Overall, this study confirms the predictability of stock expected returns based on fundamental values relative to prices in the context of investor behavior.

Keywords: Anchoring bias, Earnings-price ratio, Value strategy

JEL Classification: G11, G14

Suggested Citation

Chen, Li-Wen and Yu, Hsin-Yi, Anchoring Bias and Value Strategy (May 29, 2012). Available at SSRN: https://ssrn.com/abstract=1818642 or http://dx.doi.org/10.2139/ssrn.1818642

Li-Wen Chen (Contact Author)

National Chung Cheng University ( email )

Min-Shiung, Chia-Yi, 621
Taiwan

Hsin-Yi Yu

University of Edinburgh - Organisation Studies ( email )

50 George Square
William Robertson Building
Edinburgh EH8 9JY
UNITED KINGDOM

National University of Kaohsiung ( email )

Kaohsiung, 803
Taiwan

University of Edinburgh - Accounting and Finance ( email )

William Robertson Building
Edinburgh EH8 9JY
United Kingdom

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