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Why are British Premium Bonds so Successful? The Effect of Saving With a Thrill

42 Pages Posted: 19 Mar 2008  

Sebastian Lobe

University of Maine - Maine Business School

Alexander Hölzl

University of Regensburg

Date Written: April 2007

Abstract

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

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

Sebastian Lobe (Contact Author)

University of Maine - Maine Business School ( email )

Orono, ME 04469
United States
+1 (207) 581-1949 (Phone)

Alexander Hölzl

University of Regensburg ( email )

93040 Regensburg
D-93040 Regensburg, 93053
Germany

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