38 Pages Posted: 3 Jul 2013 Last revised: 1 Feb 2016
Date Written: 2016
Despite assumptions of mean-variance efficiency that underlie most asset pricing models, investors have shown a penchant for positive skewness. This study documents that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries. These results suggest that investors’ preferences for lottery-type stocks might be reflected in the level of call option volume. Perhaps, more importantly, we test whether these preferences affect future spot price volatility. Consistent with our expectation, we find that preferences for lotteries by call option traders directly affect future volatility in the underlying asset.
Keywords: options, lotteries, volatility
JEL Classification: G10, G14, G19
Suggested Citation: Suggested Citation
Blau, Benjamin M. and Bowles, Boone and Whitby, Ryan J., Gambling Preferences, Options Markets, and Volatility (2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2288910 or http://dx.doi.org/10.2139/ssrn.2288910