Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 76-90 |
| Number of pages | 15 |
| Journal | Journal of Banking and Finance |
| Volume | 65 |
| DOIs | |
| Publication status | Published - 1 Apr 2016 |
Keywords
- Idiosyncratic volatility
- Lottery
- MAX
- Mispricing
- Risk factor
Cite this
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The MAX effect : An exploration of risk and mispricing explanations. / Zhong, Angel; Gray, Phil.
In: Journal of Banking and Finance, Vol. 65, 01.04.2016, p. 76-90.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - The MAX effect
T2 - An exploration of risk and mispricing explanations
AU - Zhong, Angel
AU - Gray, Phil
PY - 2016/4/1
Y1 - 2016/4/1
N2 - This paper studies the role that risk and mispricing play in the negative relation between extreme positive returns and future returns. We document a strong 'MAX effect' in Australian equities over 1991-2013 that is robust to risk adjustment, controlling for other influential stock characteristics and, importantly, manifests in a partition of the 500 largest stocks. While there is no evidence that MAX proxies for sensitivity to risk, the findings are highly consistent with a mispricing explanation. Adapting the recent methodological innovation of Stambaugh et al. (2015) to classify stocks by their degree of mispricing, we show that the MAX effect concentrates amongst the most-overpriced stocks but actually reverses amongst the most-underpriced stocks. Consistent with arbitrage asymmetry, the magnitude of the MAX effect amongst overpriced stocks exceeds that amongst underpriced stocks, leading to the overall negative relation that has been well documented.
AB - This paper studies the role that risk and mispricing play in the negative relation between extreme positive returns and future returns. We document a strong 'MAX effect' in Australian equities over 1991-2013 that is robust to risk adjustment, controlling for other influential stock characteristics and, importantly, manifests in a partition of the 500 largest stocks. While there is no evidence that MAX proxies for sensitivity to risk, the findings are highly consistent with a mispricing explanation. Adapting the recent methodological innovation of Stambaugh et al. (2015) to classify stocks by their degree of mispricing, we show that the MAX effect concentrates amongst the most-overpriced stocks but actually reverses amongst the most-underpriced stocks. Consistent with arbitrage asymmetry, the magnitude of the MAX effect amongst overpriced stocks exceeds that amongst underpriced stocks, leading to the overall negative relation that has been well documented.
KW - Idiosyncratic volatility
KW - Lottery
KW - MAX
KW - Mispricing
KW - Risk factor
UR - http://www.scopus.com/inward/record.url?scp=84957808521&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2016.01.007
DO - 10.1016/j.jbankfin.2016.01.007
M3 - Article
VL - 65
SP - 76
EP - 90
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
ER -