CAN STOCK PRICE MOMENTUM BE EXPLAINED BY ANCHORING?

Using German stock data from 1980 to 2008, this study tests whether stock price momentum can be explained by anchoring – a specific form of non-rational behavior. Three different empirical tests indicate that anchoring is the driver of the 52-week high strategy which is long in stocks with a price at or close to their one year high price and short in stocks with a price far from their 52-week high. With sorting and regression approaches, it is further shown that the 52-week high strategy itself largely dominates the momentum strategy and that the distance of a stock’s price to its 52-week high price is a better predictor of future returns than the momentum criterion.