Maximum Daily Gains and the Subsequent Returns of Lottery-Like Stocks

Summary

This study examines stocks that attract investors seeking rare, extreme gains. It defines lottery-like stocks as those in the highest group when stocks are sorted into ten groups by their largest daily gain over the prior month. The proposed behavioral explanation is that investors may take profits after exceptional price jumps, leaving these stocks with weaker subsequent returns.

Across equal-weighted and float-market-cap-weighted portfolios, the lottery-like group had the lowest average return in the following month. Stocks’ maximum daily gain was negatively related to next-month expected return, and the equal-weighted spread between the extreme groups exceeded 1% and was statistically significant at the 5% level. Two-variable sorts showed the relation persisted after controlling for other factors, including reversal, suggesting the signal was not fully explained by reversal. The summary does not provide sample dates, transaction costs, or evidence outside the tested setting.

Key ideas

• The study defines lottery-like stocks using the largest daily gain in the previous month.
• The highest-gain group had the lowest average return in the following month under both weighting methods.
• Maximum daily gain was negatively associated with next-month returns in the reported analysis.
• The relation remained after controlling for reversal, indicating that reversal alone did not explain it.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.