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The MAX effect: European evidence

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  • Walkshäusl, Christian

Abstract

The maximum daily return over the previous month (MAX) of Bali et al. (2011) is a strong and significant predictor of future stock returns in non-U.S. equity markets. Once it is controlled for MAX in the cross-section of average returns, the puzzling negative idiosyncratic volatility-return relation disappears. Consistent with the assumption that MAX is the true effect, for which idiosyncratic volatility is just a proxy, we find that MAX can be traced back to firm fundamentals in the manner of idiosyncratic volatility. The negative MAX-return relation is stronger among firms with high cash flow volatility and weaker among firms with high profitability.

Suggested Citation

  • Walkshäusl, Christian, 2014. "The MAX effect: European evidence," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 1-10.
    • Handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:1-10
    DOI: 10.1016/j.jbankfin.2014.01.020
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    Cited by:

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    3. Kwon, Kyung Yoon & Min, Byoung-Kyu & Sun, Chenfei, 2022. "Enhancing the profitability of lottery strategies," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 166-184.
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    5. Gao, Ya & Han, Xing & Xiong, Xiong, 2021. "Loss from the chasing of MAX stocks: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    6. Fan, Ruixin & Xiong, Xiong & Gao, Ya, 2021. "Can the probability of extreme returns be the basis for profitable portfolios? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Maximum daily return; Cross-sectional return predictability; International markets; Idiosyncratic volatility; Cash flow volatility; Profitability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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