Lottery Preference and Anomalies

78 Pages Posted: 4 Jun 2020 Last revised: 8 Jun 2020

See all articles by Lei Jiang

Lei Jiang

Tsinghua University

Quan Wen

Georgetown University - Department of Finance

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Yifeng Zhu

School of Finance, Central University of Finance and Economics

Date Written: May 31, 2020

Abstract

We construct a lottery factor that aggregates the information of 16 commonly used lottery features. The lottery factor significantly improves the explanatory power of the four-factor q model in Hou, Xue, and Zhang (2015) and explains all but a few major anomaly returns. In assessing the implication of lottery preference on profitability of anomaly-based trading strategies, we find that anomaly returns are significantly stronger among stocks with strong lottery preference. Moreover, the anomaly spread portfolios are mainly driven by the short leg among stocks with stronger lottery preference. The effect of lottery feature on anomalies is not driven by financial distress and is related to investors being reluctant to short sell stocks with high lottery features due to the high upside risk.

Keywords: Lottery preference factor, anomalies, asset pricing

JEL Classification: G11, G12

Suggested Citation

Jiang, Lei and Wen, Quan and Zhou, Guofu and Zhu, Yifeng, Lottery Preference and Anomalies (May 31, 2020). Available at SSRN: https://ssrn.com/abstract=3595419 or http://dx.doi.org/10.2139/ssrn.3595419

Lei Jiang

Tsinghua University ( email )

Beijing, 100084
China

Quan Wen

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Yifeng Zhu

School of Finance, Central University of Finance and Economics ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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