In this study, we use several indices to empirically test the two proxies proposed by Li and Yu (2012) in the Taiwan stock market, which they find capturing the degree of investor underreaction and overreaction to news, namely, nearness to the 52-week high and nearness to the historical high. We use six important stock price indices including market indices and sector indices to construct the two psychologically motivated proxies, and compare their predictive ability to forecast future aggregate market returns. Particularly, we not only study on domestic indices, but also investigate the influence of MSCI index on Taiwan market, which is constructed by a foreign institution and widely used by foreign investors. We find that after controlling for the business cycle, the proxies using Taiwan Capitalization Weighted Stock Index, MSCI Taiwan Index, and Electronic Sector Index have significantly strong predictive power, while MSCI Taiwan Index is the most significant. Their nearness to the 52-week high positively predicts future market returns, while their nearness to the historical high negatively predicts future market returns. The results may due to their high visibility in the Taiwan market. These findings are consistent with the limited investor attention and anchoring hypothesis.

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