Range-Based Expectations

78 Pages Posted: 2 Dec 2019 Last revised: 4 Feb 2020

Date Written: November 15, 2019


I propose and document empirically that investors form “range-based” expectations – expectations that are influenced by an asset’s past trading range – and that these beliefs affect trading behavior and asset prices. I find that, if an asset’s price is high (low) relative to its 52- week trading range, investors erroneously believe that the asset’s future return distribution is negatively (positively) skewed. Consistent with these beliefs, less sophisticated investors trade options in a way that decreases their exposure to underlying stocks that have a high price relative to their 52-week range; moreover, individual investors are more likely to sell and not buy such stocks. Also consistent with these beliefs, stocks with a high (low) price relative to their past trading range earn high (low) subsequent returns, on average.

JEL Classification: G02, G11, G12

Suggested Citation

Zhu, Natalie, Range-Based Expectations (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3488134 or http://dx.doi.org/10.2139/ssrn.3488134

Natalie Zhu (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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