SSRN-Industry Information and the 52-Week High Effect by Xin Hong, Bradford Jordan, Mark Liu

SSRN-Industry Information and the 52-Week High Effect by Xin Hong, Bradford Jordan, and Mark Liu: "find

Interesting paper. Chances are you have heard of the George and Hwang 2004 article that reports that stocks near their 52 week high did better than firms not near their 52 week high (a strike against weak form efficiency). Now Hong, Jordan, and Liu further investigate this and find that there is a large industry effect and suggest the cause of the findings is an anchoring bias.

Abstract: (emphasis is mine)

"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 under-reaction 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 under-reaction to industry instead of firm-specific information. The extent of under-reaction 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). Our results hold even after controlling for both individual and industry return momentum effects."