NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

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

NBER Working Paper No. 14804
Issued in March 2009
NBER Program(s):AP

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).

download in pdf format
   (353 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

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,

Users who downloaded this paper also downloaded* these:
Barberis and Huang w12936 Stocks as Lotteries: The Implications of Probability Weighting for Security Prices
Ang, Hodrick, Xing, and Zhang w13739 High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence
An, Ang, Bali, and Cakici w19590 The Joint Cross Section of Stocks and Options
Novy-Marx w15940 The Other Side of Value: Good Growth and the Gross Profitability Premium
Ang, Hodrick, Xing, and Zhang w10852 The Cross-Section of Volatility and Expected Returns
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us