Hot Potatoes: Underpricing of Stocks following Extreme Negative Returns

45 Pages Posted: 19 Jan 2021 Last revised: 1 Apr 2021

See all articles by Mustafa Onur Caglayan

Mustafa Onur Caglayan

Florida International University

Robinson Reyes-Peña

Florida International University

Date Written: March 26, 2021

Abstract

Although it is well established that investors are willing to 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 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 MIN positively predicts future stock returns. More importantly, a strategy that buys pure high-MIN stocks and shorts pure high-MAX stocks generates superior returns compared to stand-alone MAX and/or MIN strategies.

Keywords: extreme returns, maximum daily losses, underpricing

JEL Classification: G11, G12, G17

Suggested Citation

Caglayan, Mustafa Onur and Reyes-Peña, Robinson, Hot Potatoes: Underpricing of Stocks following Extreme Negative Returns (March 26, 2021). 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

Robinson Reyes-Peña

Florida International University ( email )

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

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