Critical Finance Review > Vol 11 > Issue 3-4

It Could Be Overreaction, Not Lottery Seeking, That Is Behind Bali, Cakici and Whitelaw’s Max Effect

Jake Gorman, Curtin University, Australia, jake.gorman@curtin.edu.au , Farida Akhtar, Macquarie University, Australia, farida.akhtar@mq.edu.au , Robert B. Durand, Curtin University, Australia, robert.durand@curtin.edu.au , John Gould, Curtin University, Australia, j.gould@curtin.edu.au
 
Suggested Citation
Jake Gorman, Farida Akhtar, Robert B. Durand and John Gould (2022), "It Could Be Overreaction, Not Lottery Seeking, That Is Behind Bali, Cakici and Whitelaw’s Max Effect", Critical Finance Review: Vol. 11: No. 3-4, pp 647-675. http://dx.doi.org/10.1561/104.00000123

Publication Date: 10 Aug 2022
© 2022 Jake Gorman, Farida Akhtar, Robert B. Durand and John Gould
 
Subjects
 
Keywords
G11G17G12
Extreme returnsLottery-like payoffsGamblingOverreactionReversal
 

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In this article:
1. Background 
2. Data and High Max Prediction Methodology 
3. Dissecting the Max Effect 
4. The Max Effect in Event-Time 
5. Conclusion 
Appendix 
References 

Abstract

Bali et al. (2011) introduce the MAX effect asset pricing anomaly: high MAX stocks (being stocks with the highest 10% of maximum single-day returns during a month) subsequently underperform. We find that this post-high MAX return underperformance is a general phenomenon that is independent of stocks being identified, ex-ante, as lottery-like. With an event study approach, we also find that the average high MAX event cumulative abnormal return pattern is indicative of overreaction embedded within high MAX returns.

DOI:10.1561/104.00000123