Hazard Stocks and Expected Returns

69 Pages Posted: 9 Jul 2020 Last revised: 19 Mar 2021

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate

Haim Kassa

Miami University

Gulnara R. Zaynutdinova, Ph.D.

West Virginia University, Department of Finance

Date Written: November 1, 2020

Abstract

Hazard stocks are the opposite of lottery stocks. We proxy hazard stocks with the minimum daily idiosyncratic return over the past month, “IMIN,” and examine the relation between hazard stocks and expected returns. The literature on lottery stocks implies that investors should discount hazard stocks. Anomalously, we find a negative relation between IMIN and future returns. Hedge portfolios that long high IMIN stocks and short low IMIN stocks generate monthly alphas of -0.52% to -0.76%. The results are robust after controlling for numerous firm characteristics and corporate events. The hazard stock anomaly is primarily driven by limits to arbitrage and, to a lesser degree, by firm-level information uncertainty. Via the Reg SHO pilot program, we provide causal evidence that the apparent asymmetric preferences across lottery and hazard stocks are due to arbitrage asymmetry (Stambaugh et al., 2015). This demonstrates that asymmetric arbitrage may yield what appear to be asymmetric preferences.

Keywords: hazard stocks, anomaly, lottery stocks, MAX, underreaction, equity returns, tail risk, information uncertainty, limits to arbitrage, asymmetric arbitrage

JEL Classification: G10, G11, G12

Suggested Citation

DeLisle, R. Jared and Ferguson, Michael F. and Kassa, Haim and Zaynutdinova, Gulnara R., Hazard Stocks and Expected Returns (November 1, 2020). Journal of Banking and Finance, Vol. 121, 2021, Available at SSRN: https://ssrn.com/abstract=3627669 or http://dx.doi.org/10.2139/ssrn.3627669

R. Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
513-556-7080 (Phone)

Haim Kassa (Contact Author)

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

Gulnara R. Zaynutdinova

West Virginia University, Department of Finance ( email )

John Chambers College of Business and Economics
Morgantown, WV 26506
United States

HOME PAGE: http://https://business.wvu.edu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
148
Abstract Views
661
rank
241,788
PlumX Metrics