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Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns

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  • Turan G. Bali
  • Nusret Cakici
  • Robert F. Whitelaw
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    Abstract

    Motivated by existing evidence of a preference among investors for assets with lottery-like payoffs and that many investors are poorly diversified, we investigate the significance of extreme positive returns in the cross-sectional pricing of stocks. Portfolio-level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns. Average raw and risk-adjusted return differences between stocks in the lowest and highest MAX deciles exceed 1% per month. These results are robust to controls for size, book-to-market, momentum, short-term reversals, liquidity, and skewness. Of particular interest, including MAX reverses the puzzling negative relation between returns and idiosyncratic volatility recently documented in Ang et al. (2006, 2008).

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14804.

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    Date of creation: Mar 2009
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    Publication status: published as Journal of Financial Economics Volume 99, Issue 2, February 2011, Pages 427–446 Cover image Maxing out: Stocks as lotteries and the cross-section of expected returns ☆ Turan G. Balia, 1, E-mail the corresponding author, Nusret Cakicib, 2, E-mail the corresponding author, Robert F. Whitelawc, d,
    Handle: RePEc:nbr:nberwo:14804

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    Cited by:
    1. Bley, Jorg & Saad, Mohsen, 2012. "Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(3), pages 538-554.

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