Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns

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

No 14804, NBER Working Papers from National Bureau of Economic Research, Inc

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 documented in Ang et al. (2006, 2008).

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-rmg
Note: AP
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Citations: View citations in EconPapers (5)

Published as Journal of Financial Economics Volume 99, Issue 2, February 2011, Pages 427–446 Cover image Maxing out: Stocks as lotteries and the cross-section of expected returns ☆ Turan G. Balia, 1, E-mail the corresponding author, Nusret Cakicib, 2, E-mail the corresponding author, Robert F. Whitelawc, d,

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