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Can microstructure noise explain the MAX effect?

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Listed:
  • Zhang, Xindong
  • Xie, Lixu
  • Zhai, Yue
  • Wang, Dong

Abstract

Bali et al. (2011) first find and investigate the MAX effect using raw returns (calculated by recorded closing prices), which include microstructure noise from bid-ask measurement errors. Motivated by this, we use noise-adjusted returns (which remove bid-ask errors) to examine the MAX effect and find microstructure noise is an important source of the effect. Average monthly return and five-factor alpha differences between the highest and lowest MAX stock portfolios are not significant in statistics. Most importantly, the negative five-factor alpha differences have no negative significance both in economics and statistics over equal-weighted portfolios.

Suggested Citation

  • Zhang, Xindong & Xie, Lixu & Zhai, Yue & Wang, Dong, 2018. "Can microstructure noise explain the MAX effect?," Finance Research Letters, Elsevier, vol. 26(C), pages 185-191.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:185-191
    DOI: 10.1016/j.frl.2018.01.006
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    References listed on IDEAS

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    1. Marshall Blume & Robert Stambaugh, "undated". "Biases in Computed Returns: An Application to the Size Effect (Revision of 2-83)," Rodney L. White Center for Financial Research Working Papers 11-83, Wharton School Rodney L. White Center for Financial Research.
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    Cited by:

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    2. Huang, Shuyang & Zeng, Ming, 2022. "Political sentiment and MAX effect," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    MAX; Lottery; Microstructure noise; Bid-ask errors; Five-factor;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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