The highest-lowest price range and the cross-sectional returns predictability

Abstract

Motivated by literature on heterogeneous investors, we use the difference between the highest and lowest prices to proxy the intensity of competition among bullish-bearish investors and investigate its significance in the cross-sectional pricing of stocks. Portfolio-level analyses and cross-sectional regressions indicate a negative and significant relation between the intensity of competition among investors and stock returns in the next month. Average raw returns differences between stocks in the lowest and highest deciles are 0.86% per month, and risk-adjusted returns differences are nearly 1% per month. These results are robust to size and value effects which are important two characteristics related to future returns. To explain it, we link this anomaly with risk compensation and investor mispricing. The results show that risk compensation explanation is excluded. We find that this anomaly is stronger for stocks with lower shareholding of institutional investors, higher market volatility, higher investor sentiment, and larger retail investors. Therefore, we conclude that this anomaly is caused by mispricing.