Do extreme returns matter in emerging markets? Evidence from the Chinese stock market |
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| Institution: | 1. Department of Finance, Waikato Management School, University of Waikato, Hamilton, New Zealand;2. Department of Finance, Zhongnan University of Economics and Law, #182 Nanhu Ave., Wuhan 430073 PR China;3. School of Economics and Finance, Massey Business School, Massey University – Albany Campus, Auckland, New Zealand;1. Department of Finance and Banking, School of Business, Curtin University, Miri 98009, Sarawak, Malaysia;2. Department of Accounting, Economics and Finance, Faculty of Commerce, Lincoln University, Lincoln 7647, Christchurch, New Zealand;1. The Smeal College of Business, The Pennsylvania State University, 322 Business Building, University Park, State College, 16801, Pennsylvania, USA;2. Department of Finance, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, P.Q., H3G 1M8, Canada;1. Universidad Icesi, Calle 18 #122-135, Cali, Colombia.;2. Universidad de los Andes, Calle 21 # 1–20 Ed. SD, Bogota, Colombia;3. ESAN University, Alonso de Molina 1652, Monterrico, Surco, Lima, Peru |
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| Abstract: | Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama–MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets. However, contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous idiosyncratic volatility (IV) effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results partially support the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features. |
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