Stocks with Extreme Past Returns: Lotteries or Insurance?
56 Pages Posted: 1 Sep 2012 Last revised: 4 Aug 2018
Date Written: December 18, 2017
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: Suggested Citation