The Relationship Between Extreme Positive Return And Stocks Expected Return Based On The China’s A Share Market Data

What determines stocks expected rerurn? This question has been central to modern financial economics.Investors and financial institutions are also concerned about the problem.In the classic capital asset pricing model (CAPM) setting normally distributed returms and traditional risk analysis based on mean-variance,diversity plays an important role for the investors to avoid risks.There is also this kind of condition on financial markets.Why investor have a prefer for extreme positive returns stocks? Can this kind of stocks give investors expected return?The purpose of the article is to study this phenomenon.Economists try to use a variety of models to explain this phenomenon.Some economists look more closly at the distribution of individual stock ruturns.Skewness measures the asymmetry of the return.Skewness and the possibility of extreme ruturn are related.In equilibrium,skewness is negatively related to the stock expected return.In our literatures, we examine the role of extreme positive return in the cross-sectional pricing of stocks directly.On modern financial markets, due to information asymmetry and heterogeneous beliefs, investors cannot eliminate idiosyncratic risks by holding well-diversified assets, and numerous studies have suggested that corporate idiosyncratic risk is an ignored factor that can affect stock price.Recent papers by Ang, Hodrick, Xing, and Zhang (2006,2009) contain the anomalous finding that stocks with high idiosyncratic volatility have low subsequent returns.There is no theory can give a good explanation on the negative relation between idiosyncratic volatility and stock expected returns.The stock with extreme positive returns also have high idiosyncratic volatility.We need pay more attention on the relation between idiosyncratic volatility and extreme positive returns.Could the extreme positive returns simply be proxying for idiosyncratic volatility?The article selects stocks data incude Shanghai Stock Exchange and Shenzhen Stock Exchange from January 2006 to December 2014.The article find a statstically and economical signficant relation between extreme positive returns and stock expected returns.As MAX increases,market capitalization decreases,beta increases and the lagged return increases.When we control SIZE,BM,ILL,the effect of MAX still play a role in stocks expected returns.In other words,the SIZE,BM.ILLdose not explain the relation between extrme positive returns and stock expected returns.There is no evidence that the effect of extreme positive returns is subsumed by skewness.But because of the high correlation between MAX and idiosyncratic volatilit,the negtive relation between extreme positive returns and stock expected returns has changed.Our paper examine the role of extreme positive return in the cross-sectional pricing of stocks directly. We investigate the relation between extreme positive returns and skewness and the relation between extreme positive returns and idiosyncratic volatility.We still need pay more attention on the setting of related variables.