Lottery Preference and Anomalies
71 Pages Posted: 4 Jun 2020 Last revised: 9 Feb 2021
Date Written: February 9, 2021
We construct a lottery factor based on 13 commonly used lottery proxies. The lottery factor significantly improves explanatory power of prominent factor models for anomaly returns. We find that anomaly returns are significantly stronger among stocks with high lottery feature, and are mainly driven by the short leg of lottery stocks. We show that the effect of lottery feature on anomalies is not driven by financial distress, and instead is related to investors being reluctant to short sell stocks with high lottery features due to the high upside potential.
Keywords: Lottery preference factor, anomalies, asset pricing
JEL Classification: G11, G12
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