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When are extreme daily returns not lottery? At earnings announcements!

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  • Nguyen, Hung T.
  • Truong, Cameron

Abstract

Using a sample of U.S. stocks over the period 1973–2015, we find that quarterly earnings announcements account for more than 18% of the total maximum daily returns in the top MAX portfolio. Maximum daily returns as triggered by earnings announcements do not entail lower future returns. Both portfolio and regression analyses show that the MAX phenomenon completely disappears when conditioning MAX returns on earnings announcements. We further show that earnings announcement MAX returns do not indicate a probability of future large short-term upward returns. Excluding earnings announcement MAX returns in constructing the lottery demand factor results in not only a larger lottery demand premium but also superior factor model performance.

Suggested Citation

  • Nguyen, Hung T. & Truong, Cameron, 2018. "When are extreme daily returns not lottery? At earnings announcements!," Journal of Financial Markets, Elsevier, vol. 41(C), pages 92-116.
    • Handle: RePEc:eee:finmar:v:41:y:2018:i:c:p:92-116
    DOI: 10.1016/j.finmar.2018.05.001
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    Cited by:

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    3. Baars, Maren & Mohrschladt, Hannes, 2021. "An alternative behavioral explanation for the MAX effect," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 868-886.
    4. Lin, Mei-Chen, 2023. "Time-varying MAX preference: Evidence from revenue announcements," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Grobys, Klaus & Junttila, Juha, 2021. "Speculation and lottery-like demand in cryptocurrency markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    6. Gao, Ya & Bradrania, Reza, 2024. "Property crime and lottery-related anomalies," Global Finance Journal, Elsevier, vol. 59(C).
    7. Nguyen, Hung T. & Pham, Mia Hang, 2021. "Air pollution and behavioral biases: Evidence from stock market anomalies," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    8. Chen, Zhongdong & Schmidt, Adam & Wang, Jin’ai, 2021. "Retail investor risk-seeking, attention, and the January effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    9. Andreas Oehler & Julian Schneider, 2023. "Social trading: do signal providers trigger gambling?," Review of Managerial Science, Springer, vol. 17(4), pages 1269-1331, May.
    10. Huang, Shuyang & Zeng, Ming, 2022. "Political sentiment and MAX effect," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    11. Zhu, Zhaobo & Harrison, DavidM. & Seiler, MichaelJ., 2020. "Preference for lottery features in real estate investment trusts," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 599-613.
    12. Tao, Ran & Brooks, Chris & Bell, Adrian R., 2020. "When is a MAX not the MAX? How news resolves information uncertainty," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 33-51.

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    More about this item

    Keywords

    Extreme returns; Earnings announcements; Lottery-like payoffs; Cross-sectional return predictability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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