Hot Potatoes: Underpricing of Stocks following Extreme Negative Returns

65 Pages Posted: 19 Jan 2021 Last revised: 19 May 2022

See all articles by Mustafa Onur Caglayan

Mustafa Onur Caglayan

Florida International University

Edward R. Lawrence

Florida International University (FIU) - Department of Finance

Robinson Reyes-Peña

Florida International University

Date Written: May 16, 2022

Abstract

Although investors accept a negative premium for lottery-like stocks, it is puzzling that the opposite effect is not observed in stocks experiencing large daily losses. We find that many stocks that experience large negative daily returns (MIN) also display large positive daily returns (MAX); therefore the MIN effect is subdued. Once stocks ranked as high-MAX within MIN deciles are removed, we find that the MIN effect produces significantly higher next-month returns. The subsequent-month returns following MIN are particularly higher when stocks experience negative cumulative monthly returns, when firm-specific investor sentiment is low, and when stocks are near their 52-week lows.

Keywords: extreme returns, large daily losses, underpricing

JEL Classification: G11, G12, G17

Suggested Citation

Caglayan, Mustafa Onur and Lawrence, Edward R. and Reyes-Peña, Robinson, Hot Potatoes: Underpricing of Stocks following Extreme Negative Returns (May 16, 2022). Available at SSRN: https://ssrn.com/abstract=3760190 or http://dx.doi.org/10.2139/ssrn.3760190

Mustafa Onur Caglayan (Contact Author)

Florida International University ( email )

College of Business
11200 S.W. 8th St, Ryder Building 223B
Miami, FL 33199
United States
(305) 348-8430 (Phone)

HOME PAGE: http://https://business.fiu.edu/faculty/expert-guides.cfm?FlagDirectory=Display&EMP=caglayanm

Edward R. Lawrence

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Robinson Reyes-Peña

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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