Attractiveness to Optimists and Stocks as Lotteries in the Cross-section of Expected Stock Returns

58 Pages Posted: 11 Dec 2020

Date Written: October 28, 2020

Abstract

Theoretical studies find that optimistic investors, who overweight the probabilities of better outcomes, can survive and influence asset prices even in a competitive market. To study the impact of optimistic investors on the cross-section of expected stock returns, I define the measure of attractiveness to optimists of a stock based on rank-dependent probability weighting. In both portfolio-level and firm-level analyses, I find an economically and statistically significant negative relation between the measure of attractiveness to optimists and the expected stock return even after controlling for a set of control variables in the cross-section of U.S. stock returns. Furthermore, this framework both conceptually and empirically subsumes the MAX effect, one of the most common characteristics for lottery-type stocks.

Keywords: Optimistic investor, stocks as lotteries, stock returns, rank-dependent probability weighting

JEL Classification: G11, G12

Suggested Citation

Neszveda, Gabor, Attractiveness to Optimists and Stocks as Lotteries in the Cross-section of Expected Stock Returns (October 28, 2020). Available at SSRN: https://ssrn.com/abstract=3720502 or http://dx.doi.org/10.2139/ssrn.3720502

Gabor Neszveda (Contact Author)

John von Neumann University ( email )

Izsáki street 10
Kecskemét, 6000
Hungary

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