Hot potatoes: Underpricing of stocks following extreme negative returns

Mustafa O. Caglayan, Edward Lawrence and Robinson Reyes-Peña

Journal of Banking & Finance, 2023, vol. 149, issue C

Abstract: Although investors accept a negative premium for lottery-like stocks, it is puzzling that the opposite effect is not observed among stocks experiencing large daily losses. We find that many stocks that experience large negative daily returns (MIN) also display large positive daily returns (MAX); therefore the MIN effect is subdued. Once stocks ranked as high-MAX within MIN deciles are removed, we find that the MIN effect produces significantly higher next-month returns. The subsequent-month returns following MIN are particularly higher when stocks experience negative cumulative monthly returns, when firm-specific investor sentiment is low, and when stocks are near their 52-week lows.

Keywords: Extreme returns; Large daily losses; Underpricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000018

DOI: 10.1016/j.jbankfin.2023.106757

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