Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns / Turan G. Bali, Nusret Cakici, Robert F. Whitelaw.

Format:

Book

Author/Creator:

Bali, Turan G.

Contributor:

National Bureau of Economic Research.

Cakici, Nusret.

Whitelaw, Robert F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14804.

NBER working paper series no. w14804

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Maxing Out

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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).

Notes:

Print version record

March 2009.