Return Anomalies Under Constraint: Evidence from an Emerging Market

Abstract

This study examines the presence of the MAX effect in the Tehran Stock Exchange (TSE) in Iran, an emerging market with unique regulations. The MAX effect, typically observed in developed markets, describes the inverse relationship between a stock's maximum daily return in a month and its subsequent performance. Using univariate, bivariate, time-series, and panel regression models, this research finds no significant evidence of the MAX effect in the TSE, even when controlling for market size, book-to-market ratio, momentum, liquidity, and market risk. The absence of the MAX effect is attributed to the TSE's regulatory environment, including price limits and restrictions on short-selling, which hinder arbitrage and reduce mispricing opportunities. These findings highlight the challenges of applying asset pricing models from developed markets to emerging ones and suggest further research into the role of regulatory frameworks, market efficiency, and investor behavior in shaping asset pricing anomalies in emerging markets.