MAX Effect and Investor Sentiment: Evidence from the Swedish Stock Market

Abstract

Motivated by existing literature on the impact of maximum daily returns (MAX) on subsequent stock returns and its connection to market sentiment, we investigate the potential effect of MAX on stock performance in Sweden and its relationship with market sentiment. Portfolio-level analyses provide evidence that MAX negatively affects the returns of stocks listed in Sweden, while firm-level cross-sectional regressions indicate that MAX has little to no effect on individual stock returns. Furthermore, the results indicate that the magnitude of the MAX effect is more pronounced when sentiment in the Swedish stock market was low in the previous month. The findings also suggest that high-MAX stocks are likely to retain their high MAX in future months. Finally, all findings remain robust across variations in portfolio sorting methodologies and alternative definitions of MAX.