The Maxing Out Effect Vs.the Idiosyncratic Volatility Puzzle:Evidence From Emerging African Stock Markets

This paper investigates evidence of prior month maximum daily returns(MAX)in predicting future monthly returns in five African stock markets,i.e.Egypt,Kenya,Morocco,Nigeria and South Africa.First,we report evidence of a negative MAX effect in the pooled five African stock markets,after controlling for well-documented return predictors like beta,size,book-to-market,momentum,short-term reversal,illiquidity,and skewness,which confirms recent findings of Bali et al.(2011)in the U.S stock markets.However,we only find a significant negative MAX effects in South African and Moroccan markets,but not in other individual stock markets.Second,we report evidence of negative idiosyncratic volatility effect in the pooled African stock markets.Third,we find that controlling for MAX in the cross-sectional regression of returns removes the idiosyncratic volatility predictive ability in the pooled African stock markets,hence justifying MAX as the real effect for which idiosyncratic volatility is just a proxy.We also find distinct coexistence of MAX effect and IVOL puzzle in the South African stock markets.The empirical results emphasize the importance of country verification for financial anomalies detected in developed markets and contribute to the literature of financial anomalies in regional stock markets.