Only Gamble in Town: Stock Market Gambling Around the World and Market Efficiency

Abstract

Using unique gambling data for 38 countries, we examine whether gambling-motivated trading influences aggregate financial market outcomes. We estimate that there is 3.5 times as much gambling in stock markets as there is in “traditional” gambling outlets such as casinos and lotteries. Gambling accounts for about 14% of stock market volume in developed countries and 33% in emerging retail-dominated markets. Both forms of gambling have common drivers, including wealth, region, and economic environment. Restrictions on traditional gambling generate spillovers into stock markets. Exploiting casino regulation as an instrument, we find that stock market gambling increases liquidity and consequently improves the informational efficiency of prices.

Keywords: stock market gambling, casino, state lottery, liquidity, informational efficiency

JEL Classification: G11, G12, G14