Title
Are extreme returns priced in the stock market? European evidence Are extreme returns priced in the stock market? European evidence
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Economics
Source (journal)
Journal of banking and finance. - Amsterdam
Volume/pages
37(2013) :9 , p. 3401-3411
ISSN
0378-4266
ISI
000322428600008
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper revisits some recently found evidence in the literature on the cross-section of stock returns for a carefully constructed dataset of euro area stocks. First, we confirm recent results for US data and find evidence of a negative cross-sectional relation between extreme positive returns and average returns after controlling for characteristics such as momentum, book-to-market, size, liquidity and short term return reversal. We argue that this is the case because these stocks have lottery-like characteristics, which is attractive to certain investors. Also, these stocks tend to be very volatile so that arbitrageurs are discouraged from correcting potential mispricing. As a consequence, these stocks are often overpriced and hence face lower expected returns. Second, when we control for extreme returns, the recently found negative relationship between idiosyncratic risk and future returns is less robust. In our models, after adding maximum returns, the relationship is insignificant and sometimes even positive. We also find that idiosyncratic skewness and coskewness play an important role for asset pricing, as predicted by several theoretical models.
E-info
https://repository.uantwerpen.be/docman/iruaauth/a73f1d/1d142bfbe6f.pdf
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