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Financial Times

Investor behaviour

LEX COLUMN

03/03/2003

Financial Times

P24

(c) 2003 Financial Times Limited . All Rights Reserved

It is not hard to find anecdotal evidence that retail investors buying and selling shares use rules of thumb rather than sophisticated financial analysis. One idea, suggested by behavioural-finance practitioners, is that investors define their gains and losses relative to a reference point, and that they are more likely to close positions with gains than close positions with losses. Research by Steven Huddart, Mark Lang, and Michelle Yetman, in a Pennsylvania State University working paper, establishes a clear link between a stock's 52-week high and its trading volume. In a study of trading patterns in 1,000 stocks that takes account of various other factors which affect trading, they show a clear tendency for volume to spike after a share breaches its 52-week high. There is no good economic explanation for such a pattern. That might help explain why newspapers - this one included - publish a stock's 52-week highs and lows in share-price tables when, from the standpoint of financial analysis, this is fairly useless information.

The research shows that the relationship between trading and 52-week highs is strongest for stocks listed on Nasdaq, which makes sense given large retail shareholdings in technology stocks. However, the pattern of trading in Nasdaq stocks might be worth a moment's contemplation. Nasdaq has plunged relentlessly downward for almost three years. A glance at the stock tables in the newspaper shows that few Nasdaq stocks are anywhere near their 52-week highs. When the technology sector finally bounces, there could be, after a lag, pent-up selling pressure waiting to be unleashed.

London Edition 1.

Copyright Financial Times Limited 2003. All Rights Reserved.

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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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