Dynamic Anchoring, 52-Week High, and Return Predictability

Prior studies show that momentum is induced because investors underreact to information when anchored by the 52-week high (52WH). We propose the possibility that investors’ anchoring bias could vary over time. Accordingly, we develop an alternative momentum strategy, namely thedynamic 52WH (denoted as D52WH) momentum,that buys (short sells) stocks with the nearness to the 52WH ranked in the top (bottom) 10% of the historical distribution. We show that the D52WH momentum not only generates significant profitability but also outperforms the 52WH momentum. In addition, amajor advantage of the D52WH momentum is that it experiences considerably weaker momentum crashes. Further evidence shows that the D52WH momentum is more pronounced under limited investor attention and lower shorting activities, thus confirming the underreaction-driven return predictability implied by the anchoring bias.