EconPapers    
Economics at your fingertips  
 

Investor sentiment and the MAX effect

Wai Mun Fong and Benjamin Toh

Journal of Banking & Finance, 2014, vol. 46, issue C, 190-201

Abstract: Bali et al. (2011) uncover a new anomaly (the “MAX effect”) related to investors’ desire for stocks with lottery-like payoffs. Specifically, stocks with high maximum daily returns (high MAX) over the past month perform poorly relative to stocks with low maximum daily returns (low MAX) over the past month. We show that the MAX effect is strongly dependent on investor sentiment and is mainly due to the poor performance of high MAX stocks rather than high returns of low MAX stocks. Investors’ desire to gamble in high MAX stocks is not limited to individual investors but is also present amongst some institutions. Controlling for past sentiment reduces the significance of the MAX effect. Our findings provide a behavioral underpinning to recent “optimal beliefs” theories (Brunnermeier et al., 2007) where investor optimism generates a preference for lottery-type securities.

Keywords: MAX; Lottery-like stocks; Investor sentiment; Investor optimism; Market efficiency (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (11) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426614001678
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:46:y:2014:i:c:p:190-201

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().

 
Page updated 2017-09-29
Handle: RePEc:eee:jbfina:v:46:y:2014:i:c:p:190-201