How Do Financial Market Outcomes Affect Gambling?
49 Pages Posted: 11 May 2022 Last revised: 10 Jun 2022
Date Written: May 9, 2022
A large literature in behavioral finance explores how gambling sentiments influences trading in stocks. This paper considers the reverse phenomena; the impact of financial market outcomes on aggregate gambling expenditures. We expect the wealth effect of higher realized stock returns will increase gambling (entertainment good). Similarly, we expect rising volatility will attract gamblers to equity markets seeking thrill and skewed payouts. Utilizing a novel horse wagering data (1934-2020), we study the impact of these forces on gambling expenditures. Using corporate bond spreads as a proxy for business cycles, we find that in addition to financial market outcomes, price of wagering, incomes, and availability of competing betting products are important drivers of gambling. We also find, ceteris paribus, that gambling rises during recessions. Our findings will be of interest to the gaming industry and policy makers, particularly as day trading, sports betting, online casinos, and other gambling gains broad public acceptance.
Keywords: Realized Risk Premium, Market Volatility, Stock Market’s Wealth Effect, Gambling Demand, Racetrack Gambling, Conditional Elasticity
JEL Classification: D12, G1, C13, L83
Suggested Citation: Suggested Citation