52-week High Strategy Research Articles

The 52-week High Momentum Strategy and Economic Policy Uncertainty: Evidence from China

ABSTRACT This is the first study to examine the 52-week high momentum strategy that takes economic policy uncertainty (EPU) into account. Empirically, we find significant 52-week high momentum in China, the second-largest stock market in the world, and our findings confirm the results of the US. We hypothesize that anchoring biases could explain the 52-week high momentum and generate significant momentum profits in low EPU periods. The empirical results show strong 52-week high momentum in low EPU periods; there is virtually no momentum when EPU is high, which supports our prediction. Further investigations show that there are no long-run reversals for the 52-week high momentum, and the negative impact of EPU on the 52-week high momentum decreases and eventually vanishes over the long term. All evidence supports the hypothesis that the 52-week high momentum is attributed to anchoring biases, especially when we consider EPU.

Fundamental Strength and the 52-Week High Anomaly

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.

Tests of technical trading rules and the 52-week high strategy in the corporate bond market

This article presents the first tests of technical trend-following rules (TTRs) and the 52-week high strategy in individual corporate bonds, along with comparisons to corresponding stocks. Over the 2002–2015 period, TTR and the 52-week strategy are unprofitable in both bonds and stocks. Short legs of these trend-following strategies lead to significant losses in corporate bonds, which can be interpreted as evidence of bond investors' overreaction to bad news. Thus, short-term contrarian strategies, the profitability of which is viewed as the reward to liquidity provision, are more rewarding in corporate bonds. TTR buy signals can predict lower-volatility days in bonds as in stocks, despite the low/negative return correlations between the two.

Risk-managed 52-week high industry momentum, momentum crashes and hedging macroeconomic risk

This is the first study to investigate the profitability of Barroso and Santa-Clara’s [J. Financial Econ., 2015, 116, 111–120] risk-managing approach for George and Hwang’s [J. Finance, 2004, 59, 2145–2176] 52-week high momentum strategy in an industrial portfolio setting. The findings indicate that risk-managing adds value as the Sharpe ratio increases, and the downside risk decreases notably. Even after controlling for the spread of the traditional 52-week high industry momentum strategy in association with standard risk factors, the risk-managed version generates economically and statistically significant pay-offs. Notably, the risk-managed strategy is partially explained by changes in cross-sectional return dispersion, whereas the traditional strategy does not appear to be exposed to such economic risks.

Commodities momentum: A behavioral perspective

The growth in commodity-related investments has sparked interest in the performance of momentum strategies in these markets. This paper introduces a behavioral proxy of the 52-week high and low momentum that explains a significant proportion of the variation of conventional momentum returns after controlling for commodity specific risk factors. Our findings show that the 52-week high strategy generates significant profits after accounting for transaction costs. We report that the 52-week high strategy is a better predictor of returns than conventional momentum. Our findings suggest that term structure and hedging pressure risk factors provide only a partial explanation of the results.

Echo effects and the returns from 52-week high strategies

Echo effects have been shown by the existing literature to influence the performance of conventional return-based momentum portfolios. This effect has yet to be confirmed for 52-week high momentum strategies. Our results show that the 52-week high strategy also manifests an echo effect. Increasing the skip period between the date of portfolio formation and the date of portfolio purchase 3–6 months significantly improves performance in nearly all cases analyzed. The results are robust to both in-sample and out-of-sample analyses. They are also robust to controlling for the effects on the risk of the portfolio from its return exposure to commonly used empirical return factors.

The 52-week high and momentum in the Taiwan stock market: Anchoring or recency biases?

The 52-week high price contains dual information in predicting future stock returns. On the one hand, investors are subject to the anchoring bias by viewing the 52-week high price as a reference point; on the other hand, the effect of the 52-week high price is stronger if it happened more recently, which is known as the recency bias. This paper examines the role of the 52-week high in explaining momentum profits in the Taiwan stock market by comparing two strategies that are related to anchoring and recency biases, respectively. We show that the profitability of the 52-week high strategy is attenuated by the considerably negative returns in January months, while the profitability of the recency strategy is not sensitive to the January seasonality. However, the recency strategy still displays predictable time-series patterns when conditioning variables are taken into consideration. It is profitable only during periods before 2000, expansionary periods, and up market states. Further investigations show that when all strategies are considered simultaneously, the 52-week high strategy plays a determinant role in generating momentum returns during the sample period from January 1982 to December 2012, while the recency strategy dominates the momentum profits in the 1970s. Overall, our results reveal mixed evidence for both strategies, suggesting the coexistence of the anchoring bias and the recency bias in the Taiwan stock market.

Industry information and the 52-week high effect

We find that the 52-week high effect (George and Hwang, 2004) cannot be explained by standard 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. The 52-week high strategy works best among stocks with high factor model R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). An industry 52-week high strategy to buy (sell) industries whose total capitalizations are close to (far from) their 52-week highs outperforms an idiosyncratic 52-week high strategy to buy stocks with prices close to their 52-week highs and short stocks in the same industry with prices far from their 52-week highs.

Is the 52-Week High Momentum Strategy Profitable in the Foreign Exchange Market?

Is the 52-Week High Momentum Strategy Profitable in the Foreign Exchange Market?

The 52-week high strategy and information uncertainty

This paper examines the driver of the 52-week high strategy, which is long in stocks close to their 52-week high price and short in stocks with a price far from their one-year high, and tests the hypothesis that its profitability can be explained by anchoring - a behavioral bias. To test the null, we examine whether the 52-week high criterion has more predictive power in cases of larger information uncertainty. This hypothesis is motivated by a psychological insight, which states that behavioral biases increase in uncertainty. For six proxies of ambiguity, we document a positive relationship to returns of 52-week high winner stocks and a negative relationship to returns of 52-week high loser stocks. The opposite effect of information uncertainty on winner and loser stocks implies that the 52-week high profits are increasing in uncertainty measures. Moreover, the study documents that the six variables have a similar impact on momentum profits. Hence, we cannot reject the hypothesis that anchoring explains the profits to the 52-week high strategy and that it is the driver of the momentum anomaly.

Is the 52-week high effect as strong as momentum? Evidence from developed and emerging market indices

Existing research shows that a strategy based on the 52-week high prices of individual stocks explains momentum and is able to forecast returns. Given that the momentum strategy based on international market indices is also known to be profitable, we investigate the profitability of the 52-week high strategy for both developed and emerging market indices. In each case, we find that the momentum strategy is significantly more profitable than the corresponding 52-week high strategy. In general, our results indicate that the 52-week high effect is not as reliable or as robust as the momentum effect.

Industry Information and the 52-Week High Effect

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.

The impact of liquidity and transaction costs on the 52-week high momentum strategy in Australia

In this paper we investigate the profitability of the 52-week high momentum strategy in the Australian equity market over the period 1996—2008. We provide the first examination of the economic significance of the strategy by applying short-sale restrictions and utilizing bid-and-ask prices and trading volume to proxy for transaction costs and liquidity constraints, respectively. Testing reveals that the strategy yields significantly positive raw returns when concentrated purely on the more liquid stocks in the market, with significantly negative returns evident among illiquid stocks. This suggests that the anchor-and-adjust bias on which the strategy is based only exists among stocks with sufficient liquidity. Furthermore, the 52-week high strategy comprising liquid stocks fails to produce significant dollar profits once short-sale restrictions, transaction costs and liquidity constraints are accounted for. We therefore conclude that the 52-week high momentum trading strategy is not of practical use to investors in Australia.

Predictability of Future Index Returns Based on the 52-Week High Strategy

In a landmark paper, George and Hwang (2004) show that a stock’s 52-week high price largely explains the momentum effect and that a strategy based on closeness to the 52-week high has better forecasting power for future returns than do momentum strategies. We find that the 52-week high strategy is unprofitable when applied to emerging markets indices, and that it is significantly less profitable than the corresponding momentum strategy. Overall the 52-week high effect is not as pervasive as the momentum effect.

Predictability of future index returns based on the 52-week high strategy

Abstract In a landmark paper, George and Hwang (2004) show that a stock's 52-week high price largely explains the momentum effect and that a strategy based on closeness to the 52-week high has better forecasting power for future returns than do momentum strategies. We find that the 52-week high strategy is unprofitable when applied to emerging markets indices, and that it is significantly less profitable than the corresponding momentum strategy. Overall the 52-week high effect is not as pervasive as the momentum effect.

The 52-Week High Strategy and Information Uncertainty

This paper examines the driver of the 52-week high strategy, which is long in stocks close to their 52-week high price and short in stocks with a price far from their one-year high, and tests the hypothesis that its profitability can be explained by anchoring - a behavioral bias. To test the null, we examine whether the 52-week high criterion has more predictive power in cases of larger information uncertainty. This hypothesis is motivated by a psychological insight, which states that behavioral biases increase in uncertainty. For six proxies of ambiguity, we document a positive relationship to returns of 52-week high winner stocks and a negative relationship to returns of 52-week high loser stocks. The opposite effect of information uncertainty on winner and loser stocks implies that the 52-week high profits are increasing in uncertainty measures. Moreover, the study documents that the six variables have a similar impact on momentum profits. Hence, we cannot reject the hypothesis that anchoring explains the profits to the 52-week high strategy and that it is the driver of the momentum anomaly.

The 52-Week High Momentum Strategy in International Stock Markets

We study the 52-week high momentum strategy in international stock markets proposed by George and Hwang (2004). This strategy produces profits in 18 of the 20 markets studied, and the profits are significant in 10 markets. The 52-week high momentum profits still exist conditional on past individual and industry returns, and are independent from the profits from the Jegadeesh and Titman (1993) momentum strategy. These profits are robust when we control for the Fama-French three factors and they do not show reversals in the long run. We find that the 52-week high is a better predictor of future returns than macroeconomic risk factors or the acquisition price. The individualism index has no explanatory power to the variations of the 52-week high momentum profits across different markets. However, the profits are no longer significant in most markets once transaction costs are taken into account.

Predictability of Future Index Returns Based on the 52-Week High Strategy

In a landmark paper, George and Hwang (2004) show that a stock's 52-week high price largely explains the momentum effect and that a strategy based on closeness to the 52-week high has better forecasting power for future returns than do momentum strategies. We find that the 52-week high strategy is unprofitable when applied to emerging markets indices, and that it is significantly less profitable than the corresponding momentum strategy. Overall the 52-week high effect is not as pervasive as the momentum effect. (This abstract was borrowed from another version of this item.)

The 52-Week High Strategy

Prior studies have documented momentum profits to stock portfolios formed from 52-week highs in prices. This article primarily examines the pattern of returns to portfolios formed from other highs besides the 52-week high and from the time interval between current prices and the prior high. This study finds evidence suggesting that investors attach value to prior highs and lows besides the 52-week high/low, but the 52-week high/low appears to have more value than the others. The results imply that prior price extremes contain information about future returns and present a challenge to market efficiency. <b>TOPICS:</b>Portfolio construction, security analysis and valuation, exchanges/markets/clearinghouses