Maxing out: the puzzling influence of past maximum returns on future asset prices in a cross-country analysis

Abstract

We examine the role of extreme positive returns in the cross-section of stock returns in seven countries. While Bali et al. (J Financ Econ 99:427–446, 2011) find a significantly negative relation between the maximum daily returns over the past month (MAX) and the expected returns in the following month, we find that this relation disappears and even often reverses. The positive relation is found in Canada, the UK and the US, while the pattern in China is more in line with the previous findings, and for Germany, France and Japan the effect is not statistically significant. Further evidence using the US data suggests that the positive effect of MAX is largely a proxy for the idiosyncratic volatility. Moreover, we find that the MAX effect is mainly concentrated on periods before 1990’s given the same dataset as Bali et al. (2011). Collectively, our results indicate that the MAX effect is not stable over time. We conjecture the changing proportion of MAX-seeking investors is a crucial determinant of the MAX-return relation.

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Notes

  1. 1.

    Reported in The Economist (May 31, 2011). Liquidity and lottery tickets—Why investors overpay for certain assets.

  2. 2.

    See Odean (1999), Campbell et al. (2001), Mitton and Vorkink (2007) and Goetzmann and Kumar (2007).

  3. 3.

    The main analysis in Bali et al. (2011) was based on a sample from 1962 to 2005, although they also had robustness tests with data starting in 1926.

  4. 4.

    Such an analysis is argued to be preferable over a portfolio analysis, see Bali et al. (2011) and Lo and Mackinlay (1990). Moreover, small sample sizes for some of our countries might make the portfolio level analysis questionable.

  5. 5.

    In the original paper, their results show that inclusion of MAX variable reverses the anomalous negative relation between idiosyncratic volatility and returns in Ang et al. (2006).

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Correspondence to Marc Oliver Rieger.

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Yuan, S., Rieger, M.O. & Caliskan, N. Maxing out: the puzzling influence of past maximum returns on future asset prices in a cross-country analysis. Manag Rev Q 70, 567–589 (2020). https://doi.org/10.1007/s11301-019-00176-3

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Keywords

  • Extreme positive returns
  • Cross-sectional returns
  • Factor-model
  • Idiosyncratic volatility

JEL Classification

  • G4
  • G12