Research On Maximum Daily Return Effect

The classic financial theory documents that investors are completely rational,and the formation process of asset price is not only affected by the macroeconomic,but also closely related to the market microstructure.However,based on the assumptions of beliefs heterogeneous of investors,the behavioral finance theory believes that investors' sentiments,regret,incomplete attention and other behavioral factors can influence the investment behavior,so the asset prices deviate from its value.And then,many “anomalies” which cannot be explained by the traditional asset pricing model are produced.The emergence of each “anomaly” not only is a challenge to the traditional asset pricing model,but also provide a new perspective or approach to explore the asset price formation and changing regularity,which provides an opportunity for the development and improvement of asset pricing model and promotes the development of financial discipline.Such as the size effect and the book to market effect extend the asset pricing model from the original single factor model relying only on market factors to the famous Fama-French three factor model including the market factor,the scale factor and the book market ratio factor.However,the proposition of each “anomaly” is also faced with two key issues.The first,the authenticity of the “anomaly” need consideration.Asset pricing model may be limited to that time,and for the moment,the former so-called “anomaly” may just compensation for the risk of system,such as size effect and book to market effect and so on.The second is the reasons for the emergence of “anomaly”.The new Nobel prize winner Fama as the representative of the scholars try to explain various “anomalies” based on efficient market hypothesis.The behavior finance school explain them from the perspective of investor behavior.In this paper,the maximum daily return effect finding in the U.S.stock market as our research object,based on the perspective of market microstructure,through the classical univariate portfolio-level analysis,multivariate portfolio-level analysis,Fama-MacBeth cross-sectional regression,time series regression and variance ratio test and other empirical methods,the paper explores the existence of the maximum daily return effect in the U.S.stock market and the reasons of the maximum daily return effect.By contrast we also examine whether the Chinese stock market has the maximum daily return effect and the corresponding reasons are analyzed in the final paper.The following conclusions are obtained through the systematic study.Firstly,the sample includes all New York Stock Exchange,American Stock Exchange,and NASDAQ all common shares from the Center for Research in Security Prices(CRSP)for the period from January 1967 through December 2014.Through univariate portfolio-level analysis,we find that the portfolio with higher(lower)maximum daily return has lower(higher)the subsequent month return,and the average return difference between the highest and the lowest maximum daily return portfolio is significant,(namely the original maximum daily return premium),that is maximum daily return effect.Though dynamic subsample analysis with investment period of 24 years and window width of 3 years,and subsample analysis with the change of the minimum quotation unit as the dividing point,and subsample analysis of bull market and bear market as the dividing point,we show that maximum daily return effect is not robust.Secondly,comparing maximum daily returns risk premiums adjusted by CAPM,Fama-French three factor model,Fama-French-Carhart four factor model,Liu two factor model,Fama-French five factor model and Hou-Xue-Zhang four factor model(risk-adjusted maximum daily return premium),we find that Hou-Xue-Zhang four factor model can well explain the maximum daily return premium,risk-adjusted return differences between stocks in the lowest and highest MAX deciles is no longer significant.Therefore,the maximum daily return effect only is the compensation for risk in the U.S.stock market.Thirdly,the results of the portfolios characteristics analysis show that the highest maximum daily return portfolio has the similar characteristics with the highest month return.Through bivariate portfolio-level analysis and Fama-MacBeth cross-sectional regression analysis,we further find that it is reversal of monthly stock returns that make the maximum daily return can expect the future returns of the stock.The traditional financial school believes that the bid-ask spread is the only reason for the short-term reversal of stock returns.However,the behavioral finance school believes that the short-term reversal of stock returns is due to the market overreaction to the new information.Based on three special cases,the path graph and the joint distribution of the observed price change and the “true” price change be analyzed,the results show that bid-ask spread intensifies the fluctuations of observed returns,but do not cause short-term reversal absolutely.When the “true” returns show a strong negative first order autocorrelation,the effect of bid-ask spread is not obvious.All common shares of NASDAQ as the sample,through cross-sectional regression and variance ratio test,we find that the reversal of monthly stock returns is determined by the bid-ask spread and the market overreaction to the new information collectively.Accordingly,the maximum daily return effect can be partly explained by market microstructure.Finally,all shares of Chinese A-share market except for ST shares as samples,we find that the maximum daily return effect is existent in China stock market also,but it is different with the maximum daily return effect of US stock markets.Through bivariate portfolio-level analysis and Fama-MacBeth cross-sectional regression analysis,we find that the maximum daily return effect of China stock market cannot be explained by the monthly returns reversal effect.However,the turnover can well explain the maximum daily return effect.Therefore,the microstructure of China stock market can well explain the maximum daily return effect.By comparing the investment strategies based on the maximum daily return in China and US stock markets,we find that the long and short strategy based on maximum daily return tend to bear market investment strategies.When the stock market is in decline stage,taking the long and short strategy of maximum daily returns,American investors can get a significant premium.and for Chinese investors,the strategy is equally effective in the bear market period,they not only can avoid the loss but also obtain significant excess return.