Stocks with Extreme Past Returns: Lotteries or Insurance?

56 Pages Posted: 1 Sep 2012 Last revised: 4 Aug 2018

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Date Written: December 18, 2017

Abstract

The paper shows that lottery-like stocks are hedges against unexpected increases in market volatility. The loading on the aggregate volatility risk factor explains low returns to stocks with high maximum returns in the past (Bali, Cakici, and Whitelaw, 2011) and high expected skewness (Boyer, Mitton, and Vorkink, 2010). Aggregate volatility risk also explains the new evidence that the maximum effect and the skewness effect are stronger for the firms with high short-sale constraints, high market-to-book, and low credit rating.

Keywords: extreme returns, skewness, lottery, idiosyncratic volatility, aggregate volatility risk

JEL Classification: G11, G12, E44

Suggested Citation

Barinov, Alexander, Stocks with Extreme Past Returns: Lotteries or Insurance? (December 18, 2017). Journal of Financial Economics (JFE), 2018, v. 129 (3), pp. 458--478. Available at SSRN: https://ssrn.com/abstract=2139236 or http://dx.doi.org/10.2139/ssrn.2139236

Alexander Barinov (Contact Author)

University of California Riverside ( email )

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HOME PAGE: http://faculty.ucr.edu/~abarinov/

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