Lottery-Related Anomalies: The Role of Reference-Dependent Preferences

71 Pages Posted: 28 Jul 2015 Last revised: 31 Jul 2018

See all articles by Li An

Li An

Tsinghua University - PBC School of Finance

Huijun Wang

Auburn University; University of Melbourne

Jian Wang

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Jianfeng Yu

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2018

Abstract

Previous empirical studies find that lottery-like stocks significantly underperform their non-lottery-like counterparts. Using five different measures of the lottery features in the literature, we document that the anomalies associated with these measures are state-dependent: the evidence supporting these anomalies is strong and robust among stocks where investors have lost money, while among stocks where investors have gained profits, the evidence is either weak or even reversed. Several potential explanations for such empirical findings are examined and we document support for the explanation based on reference-dependent preferences. Our results provide a unified framework to understand the lottery-related anomalies in the literature.

Keywords: prospect theory, lottery, reference point, skewness, default, failure probability, capital gains overhang

JEL Classification: G02, G12, G14

Suggested Citation

An, Li and Wang, Huijun and Wang, Jian and Yu, Jianfeng, Lottery-Related Anomalies: The Role of Reference-Dependent Preferences (July 1, 2018). PBCSF-NIFR Research Paper No. 15-04, Available at SSRN: https://ssrn.com/abstract=2636610 or http://dx.doi.org/10.2139/ssrn.2636610

Li An

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Huijun Wang

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

Jian Wang

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://jianwang.weebly.com

Shenzhen Finance Institute ( email )

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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