Predictability of Extreme Returns in the Turkish Stock Market

ABSTRACT

In this paper, we show that extreme returns can predict future returns in the Turkish stock market. We find that extreme return (high MAX) generating stocks show a lower performance in the next month in this market. More explicitly, there is a strong negative relationship between the firm’s maximum (MAX) daily returns over the previous month and its succeeding stock returns. Our results are robust in both firm-level cross-sectional, and portfolio-level analysis.

KEY WORDS:

• Extreme return
• max effect
• Turkey

JEL:

• G01
• G21
• G30
• G32

Acknowledgments

We acknowledge Dr. Arifur Rahman (North South University, Bangladesh) for his constructive comments and suggestions. We also like to thank the editor Ali M. Kutan for his kind support throughout the publication process.

Shaker Ahmed gratefully acknowledges the research grant by the OP Group Research Foundation and the Jenny and Antti Wihuri Foundation.

Correction Statement

Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/mree.This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. See Arditti (1967, 1971); Kraus and Litzenberger (1976); Simkowitz and Beedles (1978); Conine and Tamarkin (1981); Kane (1982); Harvey and Siddique (2000); Brunnermeier and Parker (2005); and Brunnermeier, Gollier, and Parker (2007).

2. Details of Fama and MacBeth (1973) is in the supplementary text.

3. We formed nine portfolios with the same number of stocks and put extra stocks in the 10th portfolio if the number of stocks is not devisable by 10.