Investor Sentiment, Anchoring, and Momentum Returns.

Abstract

We hypothesize that anchoring enhances the disposition effect, while investor sentiment likely strengthens (or weakens) this effect when news contradict (or align with) the prevailing investor sentiment. This study examines the profitability of momentum strategies based on past return performance and/or proximity to the 52-week high across different sentiment states. We find that momentum returns are consistently higher following periods of optimism compared to pessimism, and are greater for stocks sorted by closeness to the 52-week high rather than by past performance. The double-sort strategy shows that a near minus far strategy within past winners or losers generates positive and significant returns following an optimistic sentiment period. Nearness to (farness from) the 52-week high enhances the disposition effect of past winners (losers), while the positive market sentiment attenuates (strengthens) it, giving rise to strong return continuations. Following an optimistic (pessimistic) market sentiment, a momentum strategy produces positive and significant returns for the far (near) portfolio due to strong return continuations of loser (winner) stocks. Past performance strengthens the cognitive dissonance effect of stocks trading near (or far from) the 52-week high during pessimistic (or optimistic) periods.