Lottery Preference and Anomalies

Abstract

We construct a lottery factor based on 13 commonly used lottery proxies, and show that the lottery factor significantly improves explanatory power of prominent factor models. We find that anomaly returns are significantly stronger among stocks with high lottery features and are mainly driven by the short leg of lottery stocks. The effect of the lottery feature on anomalies is not driven by financial distress or investor sentiment, and instead is related to investors being reluctant to short sell stocks with high lottery features due to potentially high upside risk.

Keywords: Lottery preference factor, anomalies, asset pricing

JEL Classification: G11, G12