Maxing out: Stocks as lotteries and the cross-section of expected returns |
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Authors: | Turan G. Bali Nusret Cakici Robert F. Whitelaw |
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Affiliation: | 1. Department of Economics and Finance, Zicklin School of Business, Baruch College, One Bernard Baruch Way, Box 10-225, New York, NY 10010, United States;2. Department of Finance, Fordham University, Fordham University, 113 West 60th Street, New York, NY 10023, United States;3. Stern School of Business, New York University, 44 W. 4th Street, Suite 9-190, New York, NY 10012, United States;4. NBER, United States |
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Abstract: | 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 shown in 2 and 3. |
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Keywords: | G11 G17 G12 |
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