Volume 29, Issue 4, 2020
DOI: 10.24205/03276716.2020.818
The Impact of Anchoring Bias on the Profitability of Time-Series Momentum
Abstract
The motivation of this study bases on the role of anchoring bias on the profitability of the time-series momentum strategy. Market-wide nearness to the Dow 52-week high is computed, we use a market-timing approach that relies on the ability of nearness to the Dow 52-week high to predict future time-series momentum returns. Findings show that the market-timing strategy based on nearness to Dow 52-week high is more profitable than conventional momentum strategies. Our results support the contention that investors' reluctance to bid up the price of a stock in response to positive information is due to anchoring bias. This behavioral bias leads to stronger underreaction to good news.
Keywords
time-series momentum; anchoring bias; nearness to Dow 52-week high.