Description:
This study investigates whether the MAX effect on the Korean stock market is more significant for overpriced stocks. Defining MAX as the maximum daily return for the previous month following Bali et al. (2011), we show that long low MAX and short high MAX strategies earn significantly positive returns and Fama and French (1993) three-factor alphas. Moreover, we find that the MAX effect is significant only in overpriced stock groups, categorized by the mispricing index constructed, following the methodology of Stambaugh et al. (2015). Although a high positive correlation exists between idiosyncratic volatility ( IVOL ) and MAX , the MAX effect itself has an independent information value apart from IVOL . By analyzing the direct trading behavior of investors, our results suggest that the MAX effect in the Korean stock market, which is highly relevant for overpriced stocks, can provide information to determine stock prices due to the arbitrage risk and lottery preference of individual investors