Momentum Strategies Based on Reference Points; Evidence from Adjustment and Anchoring Bias

According to empirical financial studies, a momentum investment strategy can lead to excess returns in the medium term. One of the driving factors of momentum return is adjustment and anchoring bias. Investors’ anchor to reference point price and consequent price adjustment drive momentum in price trends. In this research, based on reference points price stated by literature, Momentum investment strategies are investigated.

Using portfolio study and studying 108 firms listed in Tehran Stock Exchange over the period from 2007 to 2017 (1386-1395 in Solar Hijri-Iranian calendar), the study has been conducted.

Results indicate that investors, applying adjustment and anchoring bias, select reference points based on price extremes up to one year (especially high 26 week price) more than other reference point’s prices as anchor, generating then momentum return by this adjusted price. Furthermore, the results of the regression analysis revealed that with risk adjustments and applying other control variables, this return is robust and statistically significant.