When Is a Max Not the Max? How News Resolves Information Uncertainty

39 Pages Posted: 9 Jul 2019 Last revised: 17 Jul 2019

See all articles by Ran Tao

Ran Tao

University of Reading - ICMA Centre

Chris Brooks

University of Reading - ICMA Centre

Adrian R. Bell

University of Reading - ICMA Centre

Date Written: May 1, 2019

Abstract

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

Tao, Ran and Brooks, Chris and Bell, Adrian R., When Is a Max Not the Max? How News Resolves Information Uncertainty (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3415756 or http://dx.doi.org/10.2139/ssrn.3415756

Ran Tao (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chris Brooks

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Adrian R. Bell

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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