TY - UNPB
T1 - Liquidity, Favorite-Longshot Bias, and the Return of Lottery-Like Stocks
AU - Hwang, Chuan Yang
AU - Yi, Long
PY - 2023/8/7
Y1 - 2023/8/7
N2 - We document novel results that the lottery effect (lottery-like stocks earn lower returns) is much stronger in liquid stocks. We posit that noise traders dominate the trading of liquid lottery-like stocks, as described in the limits to arbitrage literature, who are attracted by the high jackpot probability of the lottery-like stocks and commit the favorite-longshot bias in which investors overweight the probability of a longshot. The overweight, rather than being driven by preference as suggested in the prospect theory, is more likely caused by overestimation error.
AB - We document novel results that the lottery effect (lottery-like stocks earn lower returns) is much stronger in liquid stocks. We posit that noise traders dominate the trading of liquid lottery-like stocks, as described in the limits to arbitrage literature, who are attracted by the high jackpot probability of the lottery-like stocks and commit the favorite-longshot bias in which investors overweight the probability of a longshot. The overweight, rather than being driven by preference as suggested in the prospect theory, is more likely caused by overestimation error.
KW - prospect theory
KW - favorite-long shot bias
KW - liquidity
U2 - 10.2139/ssrn.4533690
DO - 10.2139/ssrn.4533690
M3 - Working paper
T3 - S&P Global Market Intelligence Research Paper Series
BT - Liquidity, Favorite-Longshot Bias, and the Return of Lottery-Like Stocks
PB - SSRN
ER -