The robust “maximum daily return effect as demand for lottery” and “idiosyncratic volatility puzzle”

Jared Egginton and Jungshik Hur

Journal of Empirical Finance, 2018, vol. 47, issue C, 229-245

Abstract: We form indexes of overpriced and underpriced stocks by ranking stocks based on the disposition effect and anchoring bias. We document the negative relation between maximum daily return and future returns (MAX effect) is confined to overpriced stocks which make up about half the entire sample. We find that the average cross-sectional correlation between maximum daily return and idiosyncratic volatility is nearly 90%. Consistent with prior studies the idiosyncratic volatility puzzle disappears after controlling for the MAX effect. However, when using a sample with a $5 price breakpoint and controlling for overpriced stocks the idiosyncratic volatility puzzle and the MAX effect are economically and statistically significant.

Keywords: Maximum daily return; Idiosyncratic volatility puzzle; Disposition Effect; Anchoring Bias (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:47:y:2018:i:c:p:229-245

DOI: 10.1016/j.jempfin.2018.03.001

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