Author(s)

Zuojun Wen¹, Xindong Zhang¹, Yahua Wang¹, Weiqi Liu^2,3

¹School of Economics and Management, Shanxi University, Taiyuan, China.
²Key Laboratory of Complex System and Data Science, Ministry of Education, Taiyuan, China.
³Research Center of Management and Decision, Shanxi University, Taiyuan, China.

In recent years, the discovery of the MAX effect has impacted strongly the validity of factor pricing models, while investor behavior has always played a crucial role in market investment and directly influenced price formation. Based on this, using daily and monthly data of A-shares from 2005 to 2020, the paper confirms that the MAX effect still exists with the development and improvement of financial markets and can be explained by the overpayment due to investors’ lottery preferences through variable grouping return analysis, portfolio return analysis based on long-short strategy construction and Fama-Macbeth regression methods. The relationship between investor sentiment and the MAX effect is also analyzed by constructing an investor sentiment index, ISM, through principal component analysis, which shows that investor sentiment has an amplifying influence on the MAX effect, and high investor sentiment leads to stronger reversal of high MAX stock returns. By introducing investor attention to further study, we find that for high attention lottery stocks, investor sentiment can increase the degree of investors’ conversion from attention to trading behavior, which in turn makes the MAX effect stronger.

Investor Sentiment, MAX Effect, Principal Component Analysis, Investor Attention, Chinese Stock Market

Wen, Z. , Zhang, X. , Wang, Y. and Liu, W. (2023) The MAX Effect in China’s A-Share Market from the Perspective of Investor Behavior. Theoretical Economics Letters, 13, 844-866. doi: 10.4236/tel.2023.134048.