Extreme Returns and Idiosyncratic Volatility: Evidence from the Egyptian Stock Exchange

This paper examines how expected stock returns are cross-sectionally linked to both the peak daily return observed over a month (MAX) and the idiosyncratic volatility (IVOL) in the Egyptian Stock Market from June 2018 to June 2022. MAX3 is also used as an alternative to the average of the three highest daily returns over the past month (t-1). The study utilizes a number of control variables, such as Short-term reversal (REVi,t), Momentum (MOMi,t), Market Beta (BETAi,t), and market capitalization (SIZEi,t). This paper documents a significant and positive IVOL effect in bivariate analysis, indicating that the most volatile stocks tend to yield higher returns in the subsequent month. However, this IVOL effect proves to be highly sensitive, losing its statistical significance once SIZEi,t and other control variables are introduced simultaneously. In contrast, the relationship between MAX, MAX3 and the subsequent month’s return is consistently not statistically significant when the other six variables are taken into account either individually or simultaneously. Therefore, the MAX effect is not evident in the Egyptian Stock Market, while the IVOL effect is conditional and dependent on other firm characteristics.