TITLE:
The MAX Effect in China’s A-Share Market from the Perspective of Investor Behavior
AUTHORS:
Zuojun Wen, Xindong Zhang, Yahua Wang, Weiqi Liu
KEYWORDS:
Investor Sentiment, MAX Effect, Principal Component Analysis, Investor Attention, Chinese Stock Market
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.4,
August
11,
2023
ABSTRACT: In recent years, the discovery of the MAX effect has impacted strongly
the validity of factor pricing models, while investor behavior has always
played a crucial role in market investment and directly influenced price
formation. Based on this, using daily and monthly data of A-shares from 2005 to
2020, the paper confirms that the MAX effect still exists with the development
and improvement of financial markets and can be explained by the overpayment
due to investors’ lottery preferences through variable grouping return analysis, portfolio return analysis based on long-short
strategy construction and Fama-Macbeth regression methods. The relationship
between investor sentiment and the MAX effect is also analyzed by constructing
an investor sentiment index, ISM, through principal component analysis, which
shows that investor sentiment has an amplifying influence on the MAX
effect, and high investor sentiment leads to stronger reversal of high MAX
stock returns. By introducing investor attention to further study, we find that
for high attention lottery stocks, investor
sentiment can increase the degree of investors’ conversion from attention to
trading behavior, which in turn makes the MAX effect stronger.