Maximum Daily Returns and Cross-section of Asset Pricing in Chinese Markets
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Baoyi Pan, Xuanchen Zhang
This paper empirically explores the relationship between stock maximum daily returns over the past month and its subsequent returns in the next month. Exploiting Chinese stock market data over the last ten years, in each month we sort our stock pools into ten portfolios based on the maximum daily returns, and we then formulate a trading strategy that longs the portfolio with the highest extreme returns and shorts the portfolio with the lowest extreme returns. We demonstrate that our investment strategy could generate significantly positive returns, and our results are robust after changing time horizons of the indicator. Overall, our paper suggests a negative relationship between stock maximum daily returns in the last month and subsequent returns in the next month, which is a strong proof for the quantitative behavioral theory that investors prefer assets with lottery-like payoffs and positively skewed distributions.
Extreme Returns, Cross-sectional return predictability, Individual investor sentiment