Lottery Stocks and Stop-loss Rules

Abstract

We show that stop-loss rules increase the returns to investment in stocks with lottery features. These stocks, which are popular with individual investors, typically have sporadic big gains and frequent small losses. However, stop-loss rules can reduce losses and allow investors to receive the gains from large price increases. We also highlight the sell signals of popular technical rules are like stop-loss rules and are effective at increasing lottery stock risk-adjusted returns. These rules could help investors avoid instances of major historical drawdowns, are particularly beneficial in declining markets, and are robust to the inclusion of transaction costs.

Keywords: Lottery Stocks, Stop-loss Rules, Trading Strategies, Individual Investors

JEL Classification: G11, G12