What is it about?
This study investigates the presence of the MAX effect–stocks with extreme daily (positive) return in the current month perform poorly in the following month–in the Pakistani stock market (PSX). Similar to the US, Europe, and Chinese stock markets, we find a negative effect of MAX on risk-adjusted returns. Furthermore, we find that the MAX effect persists even if we extend the holding period to three-and six-month. The findings are robust for both portfolio-level and firm-level cross-sectional analyses and across subperiods, size groups, and alternative factor definitions and models.
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Why is it important?
The MAX effect exists only when the overall economy is in an expansion state. A battery of tests suggests that triviality in MAX effect during economic contraction in Pakistan is driven by the more negative subsequent performance of low-MAX stocks (short-leg), whereas, in other markets, more negative subsequent performance of high-MAX stocks (long-leg) is evident during economic downturns.
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This page is a summary of: Predictability of extreme daily returns and Preference for lottery-like stocks in an emerging market, Economic Research-Ekonomska Istraživanja, August 2021, Taylor & Francis,
DOI: 10.1080/1331677x.2021.1965000.
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