Do Past Extreme Returns Explain the Future Performance? MAX Effect Evidence from the Nordic Countries

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Journal Title
Journal ISSN
Volume Title
School of Business | Bachelor's thesis
Date
2016
Major/Subject
Mcode
Degree programme
Rahoitus
Language
en
Pages
27
Series
Abstract
I examine MAX effect, i.e. negative relation between high maximum daily returns in the past month and returns in the next month, in the Nordics. Bali et. al. (2011) first find the MAX effect in U.S.A. I examine the MAX effect in the Nordics because of lack of evidence in the Nordics and the Aboulamer et. al (2016) recent contradictory finding in Canada. I confirm the previous results about MAX effect. I find negative cross-sectional relation between high maximum returns in past month and returns in the next month after controlling for variables: beta, size, book-to-market ratio, momentum, short term reversal and illiquidity. My results are also robust for idiosyncratic volatility puzzle i.e. negative relation between high idiosyncratic volatility and returns introduced by Ang et. al (2009), in fact the idiosyncratic volatility puzzle seems to overturn to positive effect after controlling MAX. The effect is consistent with investors preference for lottery-like stocks which lead to over-demand, higher prices and lower expected returns for high MAX stocks.
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Thesis advisor
Önal, Bunyamin
Keywords
MAX effect, extreme returns, asset pricing, lottery-like stocks
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