Limits to arbitrage and the MAX anomaly in advanced emerging markets |
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| Affiliation: | 1. Newcastle Business School, University of Newcastle, Newcastle, NSW 2300, Australia;2. Department of Banking and Finance, Monash University, Caulfield, Victoria 3145, Australia;1. College of Business Administration, Incheon National University, South Korea;2. Seoul National University Business School, South Korea;1. College of Management, Yuan Ze University, Taoyuan City 32001, Taiwan, ROC;2. Department of Finance, National Central University, Taoyuan City 32001, Taiwan, ROC;1. Pontifical Catholic University of Rio de Janeiro, Rua Marquês de São Vicente, 225, Gávea – Rio de Janeiro, RJ 22451-900, Brazil;2. Banco Central do Brasil, Av. Presidente Vargas, 730, Centro – Rio de Janeiro, RJ 20071-900, Brazil |
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| Abstract: | Evidence of a negative relationship between extreme positive returns and future returns has been reported in developed markets (Bali, Cakici, & Whitelaw, 2011; Zhong & Gray, 2016). This study examines this “MAX anomaly” across advanced emerging markets, which are characterised by a higher level of limits to arbitrage compared with developed markets, but lower financial frictions than their secondary emerging counterparts. The MAX anomaly is shown to be larger in magnitude in advanced emerging markets compared with developed markets. Our results support the proposition that the MAX anomaly is a pervasive anomaly that is related to mispricing. |
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