Abstract

http://ssrn.com/abstract=1262416
 
 

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


Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici


Fordham University

Robert Whitelaw


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

February 2010


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).

Number of Pages in PDF File: 49

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

JEL Classification: G10, G11, C13

working papers series





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Date posted: September 3, 2008 ; Last revised: February 27, 2012

Suggested Citation

Bali, Turan G. and Cakici, Nusret and Whitelaw, Robert, Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns (February 2010). Available at SSRN: http://ssrn.com/abstract=1262416 or http://dx.doi.org/10.2139/ssrn.1262416

Contact Information

Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

Nusret Cakici
Fordham University ( email )
Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)
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
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