Gambling Preference and the New Year Effect of Assets with Lottery Features
Review of Finance, 2012, 16(3), 685-731.
63 Pages Posted: 4 Feb 2008 Last revised: 26 Nov 2012
Date Written: February 8, 2011
This paper examines whether a New Year's gambling preference of individual investors impacts prices and returns of assets with lottery features. We find that, in January, call options have higher demand than put options, especially among small investors. In addition, relative to at-the-money calls, out-of-the-money calls are the most expensive and actively traded. In US equity markets, lottery-type stocks (low price, high idiosyncratic volatility, and high idiosyncratic skewness) outperform their counterparts in January, but tend to underperform in other months. Retail sentiment is more bullish in lottery-type stocks in January than in other months. Furthermore, lottery-type Chinese stocks outperform in the Chinese New Year month, but not in January. We suggest that this New Year effect provides new insights into the broad phenomena related to the January effect.
Keywords: January effect, Gambling, Preference for skewness, Out-of-the-money options, China
JEL Classification: G12, G14
Suggested Citation: Suggested Citation