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The MAX effect: Lottery stocks with price limits and limits to arbitrage

Weifeng Hung and J. Jimmy Yang

Journal of Financial Markets, 2018, vol. 41, issue C, 77-91

Abstract: We modify the Bali et al.’s (2011) MAX measure (maximum daily return over the prior month) when the observed returns are capped at the daily price limit to address the issue of homogeneous MAX across stocks. Our results indicate that the modified MAX measure can be a significant predictor of future stock returns. The modified MAX effect is not a manifestation of the idiosyncratic volatility effect. We also find that the modified MAX measure could be an alternative proxy for arbitrage risk.

Keywords: MAX; Price limit; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finmar:v:41:y:2018:i:c:p:77-91