Short Interest and Lottery Stocks

Financial Management, 2019, 48(1), 187-227

50 Pages Posted: 24 Jul 2017 Last revised: 3 Jun 2019

Date Written: September 22, 2017


We find that short interest-related mispricing is strongest among stocks with the most lottery-like characteristics, which are preferred by retail investors. Negative alphas for high relative short interest (RSI) stocks and positive alphas for low RSI stocks are monotonically related to stocks’ lottery features. Monthly portfolio alphas are –1.61% for stocks with high RSI and most lottery-like characteristics, while stocks with high RSI and the least lottery-like attributes show statistically insignificant alphas. Among lightly shorted stocks, lottery securities exhibit monthly alphas of 1.80%. Thus, although lottery stocks as a group typically underperform, investors can earn positive abnormal returns in lottery stocks with low RSI. Our results suggest that higher transactions costs among lottery stocks impedes arbitrage in short interest-related mispricing, particularly for low RSI stocks.

Keywords: Short interest; Lottery preference; Idiosyncratic volatility; Price; Skewness; Institutional ownership; Illiquidity

JEL Classification: G10, G12, G14

Suggested Citation

Bergsma Lovelace, Kelley and Tayal, Jitendra, Short Interest and Lottery Stocks (September 22, 2017). Financial Management, 2019, 48(1), 187-227, Available at SSRN: or

Kelley Bergsma Lovelace

Ohio University ( email )

1 Ohio University
Athens, OH OH 45701
United States

Jitendra Tayal (Contact Author)

Ohio University ( email )

Athens, OH 45701
United States

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