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Price anchors and short‐term reversals

Financial Management. July 20, 2020

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We find that price anchors have a role in understanding short‐run reversals in one‐month stock returns in conjunction with the well‐known liquidity provision channel. Specifically, we determine that one‐month reversal strategies perform much better for stocks that have: 1) a low price relative to their 52‐week high (George and Hwang, 2004) and 2) a low capital gains overhang (Grinblatt and Han, 2005). Further, we uncover striking asymmetries in the reversal behavior between past winners and past losers depending upon the stock’s price relative to the price reference points. These reversal asymmetries fit with the hypothesized price anchoring biases.