Do Extreme Returns Matter in Emerging Markets? Evidence from the Chinese Stock Market

48 Pages Posted: 1 Feb 2015 Last revised: 6 Mar 2017

See all articles by Gilbert Nartea

Gilbert Nartea

University of Canterbury - College of Business and Law

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Ji (George) Wu

Massey University - School of Economics and Finance

Date Written: August 17, 2015

Abstract

Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama-MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets though the effect appears stronger for longer holding periods. Contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous IV effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results are consistent with the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features.

Keywords: Cross-section of stock returns; Extreme returns; Predictability; China

JEL Classification: F39; G12

Suggested Citation

Nartea, Gilbert and Kong, Dongmin and Wu, Ji (George), Do Extreme Returns Matter in Emerging Markets? Evidence from the Chinese Stock Market (August 17, 2015). Journal of Banking and Finance, 2017, Available at SSRN: https://ssrn.com/abstract=2558279 or http://dx.doi.org/10.2139/ssrn.2558279

Gilbert Nartea

University of Canterbury - College of Business and Law ( email )

Christchurch, 8140
New Zealand

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Ji (George) Wu (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 102904
North Shore
Auckland, Auckland 0745
New Zealand
+6292127089 (Phone)

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