The MAX effect and its time variation in the U.S. stock market

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School of Business | Bachelor's thesis
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Date
2021
Major/Subject
Mcode
Degree programme
Rahoitus
Language
en
Pages
34
Series
Abstract
This paper examines the MAX effect and its time variation in the U.S. stock market between 2000 and 2021. The MAX effect refers to the monthly stock return difference between stocks with high and low past maximum daily returns. The paper finds evidence that the number of daily returns used as a measurement for MAX has a significant difference in the MAX effect. The five-day average of past daily returns remains a significant predictor of following monthly stock returns, but the more traditional one-day daily return measure has suffered a decrease in its predictive power. These results differ from the previous findings in the U.S. stock market and are robust to firm and stock characteristics. In addition, the study finds proof for the existing hypotheses for the MAX premium time variation. A significantly stronger MAX effect is found following periods of high market volatility and during periods of economic downturn.
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Thesis advisor
Kokkonen, Joni
Keywords
max effect, portfolio analysis, Time variation, market volatility
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