MAX is not the max under the interference of daily price limits: Evidence from China

Shouyu Yao, Chunfeng Wang, Zhenming Fang and Chaoshin Chiao

International Review of Economics & Finance, 2021, vol. 73, issue C, 348-369

Abstract: Proposing a proxy (MAX) for extremely positive returns (EPR) that trigger lottery demand, Bali et al. (2011) observe a negative relation between MAX and future stock returns in US. However, for China’s stocks with daily price limits, we observe that MAX understates EPR and their negative relation with future returns. By presenting a revised MAX (RMAX) explicitly considering price limits, we show that RMAX, free of such underestimations, exhibits persistent differences from MAX in explaining future returns. More importantly, attracted by stocks (consecutively) closing at the price limits, retail attention and subsequent retail trades contribute to the success of RMAX.

Keywords: RMAX; MAX; Retail attention; Retail trades; Daily price limits (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:73:y:2021:i:c:p:348-369

DOI: 10.1016/j.iref.2021.01.014

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