Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for August 2020 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for August 2020 (Final)
1st ETF 2nd ETF 3rd ETF

Pervasive Effects of Preference for Lottery Stocks

| | Posted in: Animal Spirits, Equity Premium

Is investor attraction to high-reward/high-risk (lottery) stocks a crucial contributor to stock return anomalies? In their May 2020 paper entitled "Lottery Preference and Anomalies", Lei Jiang, Quan Wen, Guofu Zhou and Yifeng Zhu aggregate 16 measures of lottery preference into a single long-short factor via time-varying linear combination. Examples of the 16 measures are: maximum daily return last month; average of the five highest daily returns last month; difference between maximum and minimum daily returns last month; and, skewness of daily returns the past three months. They then test the ability of this lottery preference factor to help explain a set of 19 stock return anomalies previously unexplained by a widely used 4-factor (market, size, investment and profitability) model of stock returns. They further study interactions between the lottery preference factor and 11 well-known anomalies by each month during 1980-2018 double-sorting stocks first into fifths (quintiles) based on lottery preference and then within each lottery preference quintile into sub-quintiles based on each anomaly characteristic. Using firm/stock data for a broad sample of U.S. common stocks priced over $1 during January 1962 through December 2018, they find that:

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)