42 Pages Posted: 19 Mar 2008
Date Written: April 2007
The British Premium Bond, which offers a monthly uncertain return solely based on a lottery, is an immense success. Why? We find that the bond bears relatively low risk in terms of CARA and CRRA utility. Since prizes are tax-free, the higher an individual's tax bracket, the more it pays to invest in the lottery bond. However, we demonstrate that the CARA and CRRA coefficients (before and after taxes) do not directly influence sales of the Premium Bond. Rather, our ARIMA model strongly suggests that prize skewness and the maximum holding amount are the salient influencing factors.
Keywords: Premium Bond, lottery bond, risk tolerance, skewness
JEL Classification: G12, G11
Suggested Citation: Suggested Citation
Lobe, Sebastian and Hölzl, Alexander, Why are British Premium Bonds so Successful? The Effect of Saving With a Thrill (April 2007). Available at SSRN: https://ssrn.com/abstract=992794 or http://dx.doi.org/10.2139/ssrn.992794