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Volume and Price Patterns Around a Stock's 52-Week Highs and Lows: Theory and Evidence

Steven Huddart, Mark Lang, and Michelle Yetman

We provide large sample evidence that past price extremes influence investors' trading decisions. Volume is strikingly higher, in both economic and statistical terms, when the stock price crosses either the upper or lower limit of its past trading range. This increase in volume is more pronounced the longer the time since the stock price last achieved the price extreme, the smaller the firm, the higher the individual investor interest in the stock, and the greater the ambiguity regarding valuation. These results are robust across model specifications and controls for past returns and news arrival. Volume spikes when price crosses either the upper or lower limit of the past trading range, then gradually subsides. After either event, returns are reliably positive and, among small investors, trades classified as buyer-initiated are elevated. Overall, results are more consistent with bounded rationality---specifically, the attention hypothesis posited by Barber and Odean (2008)---than with other candidate explanations.

JEL Classification: C93 D70 D81 G10

Keywords: decision analysis, prospect theory, value function, reference point, behavioral finance

Management Science Volume 55 Number 1 (January 2009) 16-31

DOI 10.1287/mnsc.1080.0920

Download the paper from SSRN.

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-0041
(814) 863-8393 fax
huddart@psu.edu
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