When Is a Max Not the Max? How News Resolves Information Uncertainty
39 Pages Posted: 9 Jul 2019 Last revised: 17 Jul 2019
Date Written: May 1, 2019
A well-known asset pricing anomaly, the "MAX" effect, measured by the maximum daily return in the past month, depicts stocks' lottery-like features and investor gambling behaviour. Using the comprehensive stock-level Dow Jones (DJNS) news database between 1979 and 2016, we consider in a empirical setting how the presence of news reports affects these lottery-type stocks. We find an augmented negative relationship between MAX stocks without news and expected returns, whereby MAX with news coverage generates return momentum. The differing future return relationships between MAX stocks with and without news appears to be best explained by information uncertainty mitigation upon news arrival. Overall, our findings suggest that news plays a role in resolving information uncertainty in the stock market.
Keywords: MAX; lottery-like stocks, news coverage, information uncertainty, stock return predictability, investor sentiment
JEL Classification: G12, G14
Suggested Citation: Suggested Citation