Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns
NBER Working Paper No. 14804
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).
Document Object Identifier (DOI): 10.3386/w14804
Published: 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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