Hazard Stocks and Expected Returns

48 Pages Posted: 9 Jul 2020

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate

Haim Kassa

Miami University

Date Written: June 15, 2020

Abstract

Hazard stocks are opposite of lottery stocks. We proxy hazard stocks with the minimum daily idiosyncratic return over the past month, a negative shock labelled IMIN, and examine the relation between hazard stocks and expected returns. The literature on lottery-stocks implies that investors should discount hazard stocks. However, we find that investors under-react to hazard stocks, with negative return continuations for up to 24 months without subsequent reversals. An IMIN-based long-short arbitrage portfolio strategy generates monthly alphas of 0.52% to 0.75%. We find consistent results using Fama-MacBeth (1973) regressions and controlling for characteristics such as MAX (Bali et al., 2011), idiosyncratic volatility, and corporate events such as earnings announcements. Furthermore, we find that both firm-level information uncertainty and limits to arbitrage, but not limited investor attention, contribute significantly to the documented under-reaction to hazard stocks.

Keywords: Hazard Stocks, Lottery Stocks, MAX, Under-reaction, Equity Returns, Tail Risk, Information Uncertainty, Limits to Arbitrage

JEL Classification: G10, G11, G12

Suggested Citation

DeLisle, Jared and Ferguson, Michael F. and Kassa, Haim, Hazard Stocks and Expected Returns (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3627669 or http://dx.doi.org/10.2139/ssrn.3627669

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
513-556-7080 (Phone)

Haim Kassa (Contact Author)

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

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