The MAX puzzle in a frontier market before and during the Covid-19 pandemic

Abstract

This study analyses the MAX anomaly in a frontier market before and during the Covid19 pandemic. Our sample has 39,673 firm-month observations of non-financial firms in Vietnam from 2008 to 2021. Using the Carhart four-factor model augmented with MAX anomaly, Fama-Macbeth two-step estimations, and portfolio analyses, we report the persistence of the MAX puzzle in Vietnam before and during the Covid-19 pandemic. The arbitrary returns between the highest and lowest MAX portfolios are around 1% per month. Finally, our results report that the MAX anomaly is subsumed by the IVOL anomaly, while the skewness fails to explain the MAX anomaly. Our findings align with the anchoring theory, prospect theory, and prior literature. Our findings align with the anchoring theory, prospect theory, and prior literature. Our study suggests that policymakers improve market transparency to protect retail investors.