Can microstructure noise explain the MAX effect?

Xindong Zhang, Lixu Xie, Yue Zhai and Dong Wang

Finance Research Letters, 2018, vol. 26, issue C, 185-191

Abstract: Bali et al. (2011) first find and investigate the MAX effect using raw returns (calculated by recorded closing prices), which include microstructure noise from bid-ask measurement errors. Motivated by this, we use noise-adjusted returns (which remove bid-ask errors) to examine the MAX effect and find microstructure noise is an important source of the effect. Average monthly return and five-factor alpha differences between the highest and lowest MAX stock portfolios are not significant in statistics. Most importantly, the negative five-factor alpha differences have no negative significance both in economics and statistics over equal-weighted portfolios.

Keywords: MAX; Lottery; Microstructure noise; Bid-ask errors; Five-factor (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:26:y:2018:i:c:p:185-191

DOI: 10.1016/j.frl.2018.01.006

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