Maxing Out in China: Optimism or Attention?

Date01 December 2020
DOIhttp://doi.org/10.1111/irfi.12241
Published date01 December 2020
Maxing Out in China: Optimism
or Attention?
MUHAMMAD A. CHEEMA
,GILBERT V. NARTEA
AND YIMEI MAN
§
Bang College of Business, KIMEP University, Almaty, Kazakhstan
Department of Economics and Finance, UC Business School, University of
Canterbury, Christchurch, New Zealand and
§
School of Accounting, Finance and Economics, Waikato Management School,
University of Waikato, Hamilton, New Zealand
ABSTRACT
Bali et al. (2011) document a maximum daily returns (MAX) premium in the
US where stocks with the highest MAX underperform stocks with the lowest
MAX in the subsequent month. However, the source of this MAX premium is
contentious. Fongand Toh (2014) nd that the MAX premium exclusively fol-
lows high sentiment periods suggesting that it is driven by investor optimism
during high sentiment periods. In contrast Cheon and Lee (2017) nd that
the MAX premium is strongerfollowing low sentiment periods suggestingthat
it is driven by the attention-grabbing characteristic of high MAX stocks in low
sentiment periods. We present evidence from China consistent with the MAX
premium being driven by investor optimism during highsentiment periods.
Accepted: 10 May 2018
I. INTRODUCTION
Bali et al. (2011) document a maximum daily returns (MAX) premium in the
US where stocks with the highest MAX underperform stocks with the lowest
MAX in the subsequent month. They attribute this MAX premium to investor
preference for lottery-like high MAX stocks resulting in an overpayment for
such stocks. Cheon and Lee (2017) afrm the existence of a MAX premium in a
multi-country study and show the MAX premium is higher for countries with
high levels of individualism using Hofstedes (2001) country individualism
index as a proxy for investor overcondence. For example, they report a MAX
premium of 1.96% per month for the US which has the highest individualism
index, and an insignicant MAX premium of 0.01% per month for China,
which ranks among the lowest on individualism index. However, the absence
of MAX premium for China reported in Cheon and Lee is inconsistent with the
signicant MAX effect reported in other studies (e.g. Carpenter et al. 2017;
Nartea et al. 2017; Wan 2018).
In a related strand in the literature, Fong and Toh (2014) nd that the
MAX premium exclusively follows high sentiment periods. They suggest that
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:4, 2020: pp. 961971
DOI: 10.1111/ir.12241

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