Are extreme negative returns priced in the Indian stock market?

Abstract

Given some recent empirical evidence showing the predictive ability of maximum daily returns (MAX) in the cross-section of stock returns, we examine the relationship between minimum daily returns (MIN) and subsequent monthly returns in the emerging stock market of India during the period 1999–2014. Our findings suggest that stocks with higher MIN in a month yield higher returns in the subsequent month with some caveats. This MIN effect is present primarily among stocks with lower market capitalization, higher illiquidity, and stocks with low institutional holdings. Furthermore, the application of quantile regression reveals that the relation between MIN and future stock returns is dynamic and quantile dependent.