The MAX Effect and Investor Sentiment in Sweden

Abstract: Motivated by existing literature about the effect of maximum daily returns (MAX) on subsequent stock returns and the link between this effect and market sentiment, we investigate the possible effect of MAX on stock performance in Sweden and its relation with market sentiment. Portfolio-level analyses show evidence of MAX negatively affecting returns of stocks listed in Sweden, while firm-level cross-sectional regressions show that MAX has little or no effect on individual stocks' returns. Research also indicates that the magnitude of the MAX effect is higher when the sentiment of the Swedish stock market is low during the previous month. Moreover, the results indicate that high MAX stocks are likely to retain their high MAX in future months. Finally, all results are robust against changing the portfolio sorting approach and the MAX definition.