Stock loan lotteries and individual investor welfare
ISSN: 1940-5979
Article publication date: 18 August 2020
Issue publication date: 22 October 2021
Abstract
Purpose
This paper proposes and models stock loan lotteries, a financial innovation that improves individual investor welfare. Stock loan lotteries are prize-linked payoffs using securities lending fees.
Design/methodology/approach
This paper solves an existing theoretical model for an investor's utility-maximizing choices with and without stock loan lotteries and compares outcomes.
Findings
Stock loan lotteries motivate prospect theory investors to buy and hold risky assets with high expected returns. Stock loan lotteries improve welfare more for poor investors and improve welfare more in a model with market frictions such as trading costs.
Social implications
Stock loan lotteries increase household savings, leading to greater financial wealth and security in retirement.
Originality/value
This paper proposes a new financial product that improves financial outcomes for individual investors.
Keywords
Acknowledgements
The author grateful to William Bazley, Frank de Jong, Vincent Gregoire, Erin Mustafa, Anisha Nyatee, Jay K. Walker, and participants at the 2017 Boulder Summer Conference on Consumer Financial Decision Making, 2017 International Workshop for Financial Systems Architecture and Stability, 2017 International Atlantic Economic Conference, 2017 Society for Judgment and Decision Making Annual Meeting, and 2018 Netspar International Pension Workshop for helpful comments and suggestions. The author thank the Canadian Derivatives Institute (CDI), formerly known as the Montreal Institute of Structured Finance and Derivatives (IFSID), for financial support (2017-2018 Research Grant R2096).
Citation
Moore, J. (2021), "Stock loan lotteries and individual investor welfare", Review of Behavioral Finance, Vol. 13 No. 5, pp. 610-630. https://doi.org/10.1108/RBF-03-2020-0056
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited