Can extreme returns predict the cross-section of expected returns in the Brazilian market?

Abstract

This article extends the evidence of maximum (MAX) and minimum (MIN) daily return effects on stock performance to the Brazilian market. Our sample includes data on daily and monthly stock returns of the firms listed on the Brazilian stock exchange between January 2001 and December 2018. To test whether extreme returns can predict the cross-section of expected returns, we perform univariate and bivariate portfolio analyses and the Fama-MacBeth regression. The results suggest a negative (positive) relationship between MAX (MIN) and the cross-section of future stock returns, which supports the hypothesis that idiosyncratic lottery-like payoffs are priced in equilibrium. This work is of interest to investors seeking insight into how to analyze high-risk and reward opportunities in the Brazilian stock market.