Quantile Based Lottery Measure and the Cross-Section of Stock Returns

Abstract

We construct a new quantile based lottery measure — QBL to evaluate the lottery preference feature of stocks. The new measure is different from the commonly used lottery proxies: maximum daily return (MAX) and skewness (SKEW). The relationship between the QBL and expected returns is negative for both the U.S. and the Chinese stock markets. However, the QBL effect can be explained by MAX in U.S. while it cannot be explained by any controls in China. During the high investor sentiment periods, the negative predictability of QBL is significant and cannot be explained by other controls for the both stock markets. Additionally, we find that the lottery preference is sensitive to the institutional ownership ratio in the U.S., while it is not the case for the Chinese stock market.

Keywords: Quantile based lottery measure, Investor sentiment, Cross-section analysis

JEL Classification: G11, G12