The MAX effect: An exploration of risk and mispricing explanations
Angel Zhong and
Journal of Banking & Finance, 2016, vol. 65, issue C, 76-90
This paper studies the role that risk and mispricing play in the negative relation between extreme positive returns and future returns. We document a strong ‘MAX effect’ in Australian equities over 1991–2013 that is robust to risk adjustment, controlling for other influential stock characteristics and, importantly, manifests in a partition of the 500 largest stocks. While there is no evidence that MAX proxies for sensitivity to risk, the findings are highly consistent with a mispricing explanation. Adapting the recent methodological innovation of Stambaugh et al. (2015) to classify stocks by their degree of mispricing, we show that the MAX effect concentrates amongst the most-overpriced stocks but actually reverses amongst the most-underpriced stocks. Consistent with arbitrage asymmetry, the magnitude of the MAX effect amongst overpriced stocks exceeds that amongst underpriced stocks, leading to the overall negative relation that has been well documented.
Keywords: MAX; Lottery; Idiosyncratic volatility; Mispricing; Risk factor (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:65:y:2016:i:c:p:76-90
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().