Lottery Preference and Anomalies

Abstract

We construct a lottery factor based on 13 commonly used lottery proxies and show that this factor adds significant explanatory power to prominent factor models for anomalies, especially for those in the skewness and value groups. 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 instead of financial distress. We find further that lottery stocks are often associated with low short volume and high shorting fees, indicating that retail investors' preference to hold lottery stocks leads to a low lendable supply of such shares.

Keywords: Lottery preference factor, anomalies, partial least square (PLS)

JEL Classification: G11, G12