State-Dependent Psychological Anchors and Momentum

2021 
Abstract George and Hwang (2004) show that momentum occurs because investors are anchored by the 52-week high when making investment decisions. In this paper, we propose that investors’ anchoring bias is state-dependent that varies with the level of the 52-week high. Using the ratio of 52-week high to historical high to capture the state-dependent nature of anchoring biases, we show that price momentum and 52-week high momentum generate significant profits only when the stock's 52-week high approaches its historical high. When the 52-week high is far from the historical high, both strategies exhibit no momentum profit.
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