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

50 Pages Posted: 24 Mar 2009 Last revised: 7 Jun 2009

See all articles by Turan G. Bali

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)

Multiple version iconThere are 3 versions of this paper

Date Written: March 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).

Suggested Citation

Bali, Turan G. and Cakici, Nusret and Whitelaw, Robert F., Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns (March 2009). NBER Working Paper No. w14804. Available at SSRN: https://ssrn.com/abstract=1366204

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
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Robert F. Whitelaw

New York University ( email )

Stern School of Business
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National Bureau of Economic Research (NBER)

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