Loss from the chasing of MAX stocks: Evidence from China |
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| Institution: | 1. School of Economics and Management, Dalian University of Technology, Dalian 116024, China;2. University of Auckland Business School, 12 Grafton Road, Auckland 1010, New Zealand;3. College of Management and Economics, Tianjin University, Tianjin 300072, China;4. Center for Social Computing and Analytics, Tianjin 300072, China;1. Shenzhen Central Sub-branch, The People’s Bank of China, Shenzhen, China;2. School of Finance, Nanjing University of Finance and Economics, Nanjing, China;3. Institute of Agricultural Economics and Development, Chinese Academy of Agricultural Sciences, Beijing, China;1. Institute of Business and Management, National Yang Ming Chiao Tung University, 118 Chung-Hsiao West Road, Section 1, Taipei, Taiwan;2. Graduate Institute of Finance, National Taiwan University of Science and Technology, 43, Keelung Rd., Section 4, Taipei, Taiwan;3. Center for General Education, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City, Taiwan;4. Science and Technology Policy Research and Information Center, National Applied Research Laboratories, 106 Heping East Road, Section 2, Taipei, Taiwan;5. Power Generation Division, Taiwan Power Company, 242, Roosevelt Road, Section 3, Taipei, Taiwan;1. Graduate Program in Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;2. Department of Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;3. Department of Statistics, University of Brasilia, 70910-900 Brasilia, D.F., Brazil;4. Graduate Program in Business Administration, University of Brasilia, 70910-900 Brasilia D.F., Brazil;5. Graduate Program in Economics, Federal University of Espirito Santo, 29075-910 Vitoria E.S., Brazil |
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| Abstract: | We evaluate the implications of the MAX effect in the Chinese financial market. First, the MAX effect prevails in China: A zero-cost MAX strategy, which goes long (short) stocks with the highest (lowest) maximum daily return in the prior month, generates significant losses over the full sample period. Second, further analysis on firm characteristics confirms that the MAX stocks exhibit lottery-like features, and the (negative) performance of the MAX strategy varies over time and is related to investor sentiment. Third, the MAX effect gets weaker after the introduction of short-selling in 2010. Finally, we document that there exists a reversed MAX effect among mutual funds, because a similarly implemented MAX strategy generates significant positive risk-adjusted returns among equity funds in China. |
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| Keywords: | MAX effect Lottery-like properties Gambling behavior Mutual funds |
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