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Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns

Turan G. Bali
CUNY Baruch College - Zicklin School of Business

Nusret Cakici
Fordham University

Robert Whitelaw
New York University; National Bureau of Economic Research (NBER)


March 6, 2009


Abstract:     
Motivated by existing evidence of a preference among investors for assets with lottery-like payoffs and that many investors are poorly diversified, we investigate the significance of extreme positive returns in the cross-sectional pricing of stocks. Portfolio-level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns. Average raw and risk-adjusted return differences between stocks in the lowest and highest MAX deciles exceed 1% per month. These results are robust to controls for size, book-to-market, momentum, short-term reversals, liquidity, and skewness. Of particular interest, including MAX reverses the puzzling negative relation between returns and idiosyncratic volatility recently documented in Ang et al. (2006, 2008).

Keywords: expected stock returns, maximum returns, idiosyncratic volatility, skewness

JEL Classifications: G10, G11, C13

Working Paper Series

Date posted: September 03, 2008 ; Last revised: March 11, 2009

Suggested Citation

Bali, Turan G., Cakici, Nusret and Whitelaw, Robert F., Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns (March 6, 2009). Available at SSRN: http://ssrn.com/abstract=1262416


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Contact Information

Robert F. Whitelaw (Contact Author)
New York University ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Turan G. Bali
CUNY Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way, Box 10-225
Department of Finance
New York, NY 10010
United States
646-312-3506 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://faculty.baruch.cuny.edu/tbali
Nusret Cakici
Fordham University ( email )
Graduate School of Business Adm
113 West 60th Street
New York, NY 10023
United States
212-636 6776 (Phone)
Feedback to SSRN (Beta)


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