Abstract
Proposing a proxy (MAX) for extremely positive returns (EPR) that trigger lottery demand, Bali et al. (2011) observe a negative relation between MAX and future stock returns in US. However, for China’s stocks with daily price limits, we observe that MAX understates EPR and their negative relation with future returns. By presenting a revised MAX (RMAX) explicitly considering price limits, we show that RMAX, free of such underestimations, exhibits persistent differences from MAX in explaining future returns. More importantly, attracted by stocks (consecutively) closing at the price limits, retail attention and subsequent retail trades contribute to the success of RMAX.
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