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MAX is not the max under the interference of daily price limits: Evidence from China

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  • Yao, Shouyu
  • Wang, Chunfeng
  • Fang, Zhenming
  • Chiao, Chaoshin

Abstract

Proposing a proxy (MAX) for extremely positive returns (EPR) that trigger lottery demand, Bali et al. (2011) observe a negative relation between MAX and future stock returns in US. However, for China’s stocks with daily price limits, we observe that MAX understates EPR and their negative relation with future returns. By presenting a revised MAX (RMAX) explicitly considering price limits, we show that RMAX, free of such underestimations, exhibits persistent differences from MAX in explaining future returns. More importantly, attracted by stocks (consecutively) closing at the price limits, retail attention and subsequent retail trades contribute to the success of RMAX.

Suggested Citation

  • Yao, Shouyu & Wang, Chunfeng & Fang, Zhenming & Chiao, Chaoshin, 2021. "MAX is not the max under the interference of daily price limits: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 348-369.
    • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:348-369
    DOI: 10.1016/j.iref.2021.01.014
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    Cited by:

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    5. Wang, Yaqi & Wang, Chunfeng & Sensoy, Ahmet & Yao, Shouyu & Cheng, Feiyang, 2022. "Can investors’ informed trading predict cryptocurrency returns? Evidence from machine learning," Research in International Business and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    RMAX; MAX; Retail attention; Retail trades; Daily price limits;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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