On a global level, we examine the relation between extreme positive returns and the cross-section of expected returns, and whether differences in risk appetite could explain the cross-country differences in the relation. Using 47,000 stocks from 44 countries for 1990-2012, we find global evidence that stocks with the high maximum daily returns in the previous month (MAX) are traded at a premium, resulting in the negative relation between MAX and returns in subsequent month. Both country- and regional-level analyses show that the returns from long-short strategy based on MAX is significant after controlling for global Fama-French three factors. We also find that the inclusion of MAX in cross-sectional regressions renders the well-known negative relation between idiosyncratic volatility and expected returns, the idiosyncratic volatility puzzle, vanish in global financial markets. Furthermore, investors from countries with higher uncertainty avoidance, measured by Uncertainty Avoidance Index of Hofstede et al. (2010), pay lower for stocks with lottery-like payoff, implying that MAX-premium is explained by preference for lottery-type stocks.
Keywords: International finance, Lottery, Extreme returns, Idiosyncratic volatility, Uncertainty Avoidance
