How the 52-Week High and Low Affect Beta and Volatility

Do stocks exhibit predictable volatility behavior near their 52-week highs and lows? In their March 2010 paper entitled “How the 52-Week High and Low Affect Beta and Volatility”, Joost Driessen, Tse-Chun Lin and Otto Van Hemert analyze whether a stock’s beta, return volatility and implied volatility change as its price approaches a 52-week high or low and after its price breaches this high or low. Using price data for a broad sample of U.S. stocks for July 1963 through December 2008 and option price data for January 1996 through September 30, they find that:

• Beta and volatility tend to decrease and trading volume tends to increase when a stock approaches a 52-week high or low. Specifically:
  • Beta decreases on average by about 0.18 when stock price approaches the 52-week high.
  • Idiosyncratic return variance decreases by an average of about 32% when approaching the 52-week high.
  • Implied volatility decreases by an average of about one point when approaching the 52-week high (compared to an average implied volatility of 43 for stocks in the sample).
  • For approaching the 52-week low, results are qualitatively similar results but much smaller.
• Volatility and trading volume tend to increase significantly after stock price breaches a 52-week high or low. Specifically:
  • Idiosyncratic return variance increases by an average of about 46% (111%) on the day after a breach of the 52-week high (low). The after-breakthrough effect lasts for a few days.
  • Implied volatilities increase significantly after a breach of the 52-week high or low.
• There is  evidence that option traders do not anticipate the potential effect of a  breach as stock price approaches a 52-week high or low.
• Abnormal returns when approaching and breaching the 52-week high or low are generally insignificant.
• Anchoring is the most likely explanation for these findings.

In summary, volatility traders may be able to exploit predictable behaviors of price volatility for stocks approaching and breaching 52-week highs and lows.

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