The Effect of the Movement in 52-Week High on Momentum Profit: The Evidence from Taiwan

Purpose: This paper aims to examine the impact of price movements in 52-week highs on a 52-week high momentum strategy. This study refers to the upward or downward movement in 52- week highs as an updating effect and determines how this effect influences the profitability of the original 52-week high momentum strategy. Design/methodology/approach: This paper decomposes the ratio of stock price to 52-week high into denoted two components: price change and updating components. We construct two momentum strategies, each focusing on adjusting either the price change or the updating component. Additionally, we employ a portfolio approach and Fama-MacBeth regression analysis to investigate the profitability of each proposed momentum strategy. Findings: The empirical results reveal that removing the price change component (updating component) from the original 52-week high measure can increases (decreases) the momentum profit, implying that the updating component dominates the price change component. Moreover, our analysis shows that when a high ratio of stock price to 52-week high is driven by a downward updating event, the subsequent positive momentum for a winner portfolio is more substantial. Research limitations/implications: This paper investigates the influence of 52-week highs movement on momentum strategies, utilizing data from Taiwan stock market. The findings reveal that accounting for the updating effect of 52-week highs can enhance the profitability of the original momentum strategy. However, it is important to note that this conclusion is currently limited to relatively inefficient stock markets. The impact on relatively efficient markets remains an area that requires further research for a comprehensive understanding. Originality/value: The finance literature widely acknowledges the 52-week high price as a reference point that can impact investors' trading psychology. Numerous empirical studies have confirmed the profitability of the 52-week high momentum investing strategy. However, these studies have not thoroughly explored the implications and effects of price movements within the scope of a 52-week high momentum strategy. Taking behavioral perspectives into account, this paper considers that the updating of 52-week high prices can influence investors' attention and subsequently impact the profitability of the momentum strategy.