Buy Low and Sell High: The 52‐Week Price Range and Predictability of Returns

• Published date: 01 March 2021
• Author: Tzu‐Pu Chang
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/irfi.12263

Buy Low and Sell High: The

52-Week Price Range and

Predictability of Returns

TZU-PUCHANG

Department of Finance, National Yunlin University of Science and Technology,

Yunlin, Taiwan

ABSTRACT

This paper uses the ratio of 52-week high to low prices to construct a self-

financing portfolio strategy, which buys stocks with a low range ratio and

sells stocks with a high range ratio according to the behavioral perspective.

The results indicate that the profits from this range strategy are substantial

and outperform those of 52-week high and conventional momentum strate-

gies. Moreover, the incremental effect of the range strategy on 52-week high

momentum is significantly positive, while the 52-week high strategy dimin-

ishes this strategy’s profitability. Overall, the range measure is better than

conventional measures at predicting future returns.

JEL Codes: G12; G40

Accepted: 4 March 2019

I. INTRODUCTION

The 52-week high momentum strategy, proposed by George and Hwang (2004,

hereafter GH), is widely documented due to its profitability being superior to

that of Jegadeesh and Titman’s (1993, hereafter JT) individual stock momentum

as well as Moskowitz and Grinblatt’s (1999, hereafter MG) industrial momen-

tum (e.g., Bhootra and Hur 2013). Aside from the 52-week high, George and

Hwang (2004) also examine the profitability of the 52-week low momentum

and report that it is positive but insignificant. Yu (2012) further presents that

the 52-week low strategy is profitable, but its profit is only half that of the

52-week high strategy. Theoretically, the literature considers that both 52-week

high and low prices are like anchor points, indicating that these two prices can

influence investors’behaviors, thus resulting in predictable returns (Huddart

et al. 2009; Driessen et al. 2013).

This paper hence proposes a portfolio strategy based on the 52-week

high/low price range. Specifically, this 52-week range strategy buys stocks

whose price range is low/narrow and sells stocks whose range is high/broad.

There are three reasons why the price range matters. First, from a behavioral

perspective, investors suffer from anchor-and-adjust bias and underreact to new

© 2019 International Review of Finance Ltd. 2019

International Review of Finance, 21:1, 2021: pp. 336–344

DOI: 10.1111/irfi.12263