Stock Loan Lotteries and Individual Investor Welfare
42 Pages Posted: 22 Apr 2020
Date Written: March 27, 2020
I propose and model stock loan lotteries, a financial innovation that improves the welfare of individual investors. Stock loan lotteries are prize-linked payoffs using net rebates from securities lending. Stock loan lotteries motivate individual investors with prospect theory preferences to buy and hold risky assets with high expected returns. Stock loan lotteries provide the greatest welfare benefit to poor investors and have greater welfare benefits in a model with realistic market frictions. I propose a method for exchanges to bypass legal and regulatory hurdles by structuring stock loan lottery tickets as derivative securities.
Keywords: Behavioral Finance, Prospect Theory, Individual Investors, Financial Innovation, Savings
JEL Classification: G02, G11, G23
Suggested Citation: Suggested Citation