Maxing out: Stocks as lotteries and the cross-section of expected returns

Turan G. Bali, Nusret Cakici and Robert F. Whitelaw

Journal of Financial Economics, 2011, vol. 99, issue 2, 427-446

Abstract: Motivated by existing evidence of a preference among investors for assets with lottery-like payoffs and that many investors are poorly diversified, we investigate the significance of extreme positive returns in the cross-sectional pricing of stocks. Portfolio-level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns. Average raw and risk-adjusted return differences between stocks in the lowest and highest MAX deciles exceed 1% per month. These results are robust to controls for size, book-to-market, momentum, short-term reversals, liquidity, and skewness. Of particular interest, including MAX reverses the puzzling negative relation between returns and idiosyncratic volatility recently shown in (Ang et al., 2006) and (Ang et al., 2009).

Keywords: Extreme; returns; Lottery-like; payoffs; Cross-sectional; return; predictability; Skewness; preference; Idiosyncratic; volatility (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (588)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-405X(10)00190-X
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:jfinec:v:99:y:2011:i:2:p:427-446

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().