The MAX effect and what drives it - Evidence from the Swedish stock market
Sammanfattning: Inspired by previous findings on the cross-sectional relationship between extreme positive daily stock returns and subsequent negative returns in the US and euro-zone markets, we search for its presence in the Swedish market. We argue that this effect, known as the MAX effect, is mainly driven by individual investors seeking lottery-like payoffs. This makes Sweden an interesting object of study due to its high share of individual investor market participation. We find a monthly return difference for stocks in the 1st and 10th MAX deciles of -1.14%, controlling for known factors such as size, book-to-market, momentum, short term reversal and illiquidity. The MAX effect is also robust for various measures of skewness. To further explore if individual investors drive this effect we use a unique data set to examine individual investor purchasing behavior. We find some indications that individual investors are behind the effect, but cannot exclude the possibility that institutional investors also contribute.
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