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Hot potatoes: Underpricing of stocks following extreme negative returns

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  • Caglayan, Mustafa O.
  • Lawrence, Edward
  • Reyes-Peña, Robinson

Abstract

Although investors accept a negative premium for lottery-like stocks, it is puzzling that the opposite effect is not observed among stocks experiencing large daily losses. We find that many stocks that experience large negative daily returns (MIN) also display large positive daily returns (MAX); therefore the MIN effect is subdued. Once stocks ranked as high-MAX within MIN deciles are removed, we find that the MIN effect produces significantly higher next-month returns. The subsequent-month returns following MIN are particularly higher when stocks experience negative cumulative monthly returns, when firm-specific investor sentiment is low, and when stocks are near their 52-week lows.

Suggested Citation

  • Caglayan, Mustafa O. & Lawrence, Edward & Reyes-Peña, Robinson, 2023. "Hot potatoes: Underpricing of stocks following extreme negative returns," Journal of Banking & Finance, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000018
    DOI: 10.1016/j.jbankfin.2023.106757
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    More about this item

    Keywords

    Extreme returns; Large daily losses; Underpricing;
    All these keywords.

    JEL classification:

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

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