Gambling and Comovement

Abstract:     
This paper shows that gambling-motivated trading activities of retail and institutional investors (i.e., gambling-induced sentiment) generate comovement in stock returns. Using the religious composition (Catholic-Protestant ratio or CPRATIO) of a region as a proxy for investors' gambling propensity and other alternative measures, we show that investors with strong propensity to gamble trade stocks with lottery features more actively and their trades are more strongly correlated. Consequently, return comovement is stronger among stocks that have lottery features and are located in high CPRATIO regions where gambling propensity is known to be strong. Further, gambling-induced comovement is amplified when lottery ticket sales are high and when local investors experience positive income shocks. In economic terms, stocks affected by gambling-induced sentiment comprise more than 14% of the overall stock market value.

Number of Pages in PDF File: 41

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