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1 – 10 of over 1000Tingting Zhang, Desheng Wei, Zhifeng Liu and Xihao Wu
This paper studies the effects of lottery preference on stock market participation at the macro level.
Abstract
Purpose
This paper studies the effects of lottery preference on stock market participation at the macro level.
Design/methodology/approach
The authors use the abnormal search volume intensity for lottery-related keywords from the Baidu search engine to capture retail investors' lottery preference. To measure stock market participation, they use five different macro-level measures from various angles. They perform the time series regression analysis in their empirical study.
Findings
First, the validation tests show that the lottery preference index in this study is reasonable. Further, the authors find that lottery preference increases people's propensity to enter and trade in the stock market. Besides, they find that the effect on trading behavior is asymmetric, that is, high lottery preference has a more significant impact on trading behavior than low lottery preference. However, lottery preference has no significant effect on the stockholding.
Originality/value
This paper contributes to the growing literature that examines the determinants of stock market participation and the role of lottery/gambling preference in the financial market. It also provides direct and novel evidence for Statman's (2002) conclusions about the similarity of lottery players and stock traders.
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John R. Nofsinger and Abhishek Varma
The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board…
Abstract
Purpose
The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board (OTCBB) and Pink Sheets), a fairly pervasive activity. The authors frame the analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information.
Design/methodology/approach
Contrary to popular perceptions, the modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts.
Findings
Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Irrespective of the price of OTC stocks, the authors find little evidence of information content in OTC trades.
Originality/value
The paper provides insight into individual investor decision making by empirically exploring the demographic and portfolio characteristics of individuals trading in OTC stocks.
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This paper proposes and models stock loan lotteries, a financial innovation that improves individual investor welfare. Stock loan lotteries are prize-linked payoffs using…
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.
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This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.
Abstract
Purpose
This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.
Design/methodology/approach
This paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.
Findings
The new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.
Originality/value
The gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.
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This paper aims to give a brief review on behavioral economics and behavioral finance and discusses some of the previous research on agents' utility functions, applicable risk…
Abstract
Purpose
This paper aims to give a brief review on behavioral economics and behavioral finance and discusses some of the previous research on agents' utility functions, applicable risk measures, diversification strategies and portfolio optimization.
Design/methodology/approach
The authors also cover related disciplines such as trading rules, contagion and various econometric aspects.
Findings
While scholars could first develop theoretical models in behavioral economics and behavioral finance, they subsequently may develop corresponding statistical and econometric models, this finally includes simulation studies to examine whether the estimators or statistics have good power and size. This all helps us to better understand financial and economic decision-making from a descriptive standpoint.
Originality/value
The research paper is original.
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Chih-Hsiang Chang, Hsu-Huei Huang, Ying-Chih Chang and Tsai-Yin Lin
– The purpose of this paper is to investigate how stock characteristics influence investor trading behavior and psychological pitfalls.
Abstract
Purpose
The purpose of this paper is to investigate how stock characteristics influence investor trading behavior and psychological pitfalls.
Design/methodology/approach
This study employs the methods of Solt and Statman (1989) and Kumar (2009) to examine investor trading activities.
Findings
Good companies do not usually have good stocks, while lottery-type stocks show better price performance than other stocks. Due to the representativeness and affect heuristics, the stocks of good companies are frequently transacted, while the low-priced stocks are infrequently transacted. Moreover, investors may display the gambler’s fallacy in the trade of stocks of good companies and the overconfidence and self-attribution bias in the trade of lottery-type stocks.
Research limitations/implications
Investors trading lottery-type stocks demonstrate greater maturity than those that trade stocks of good companies; however, psychological pitfalls still dominate investor trading behavior.
Practical implications
The representativeness heuristic of “stocks of good companies are good stocks” results in the inclusion of stocks of good companies in a portfolio and poorer price performance, whereas the inclusion of lottery-type stocks in a portfolio brings higher returns within a short period of time.
Originality/value
Compared to earlier studies that focussed on the price performance of stocks of good companies and investor trading behavior in relation to lottery-type stocks, this study aims to investigate the influence of stock characteristics on price performance, trading activities, and psychological pitfalls.
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Udayan Sharma and Madhumita Chakraborty
In the current study, the significance of extreme positive returns has been investigated in the pricing of stocks in the Indian equity market. This study aims to understand if…
Abstract
Purpose
In the current study, the significance of extreme positive returns has been investigated in the pricing of stocks in the Indian equity market. This study aims to understand if investors in India have a preference for lottery-like stocks. The existing literature provides support for MAX effect in several countries, where risk seeking in the form of gambling is an acceptable form of social behavior, suggesting a preference for lottery-like stocks. This motivates the authors to investigate whether such preference for lottery-like stocks is prevalent in a country such as India with a different cultural setting, where gambling is not socially and legally encouraged.
Design/methodology/approach
The MAX effect is tested in the Indian market for the period from January 2003 to March 2017. The average number of firms per month in this study is 2,949. Univariate and bivariate portfolio-level analyses, as well as Fama MacBeth regressions, are conducted to observe the difference between average raw and risk-adjusted returns between the stocks lying in the highest and lowest MAX deciles. Several tests have been performed for checking the robustness of the findings.
Findings
Unlike the extant literature, the authors have not found any evidence of a negative relationship between extreme positive returns and expected returns. The univariate and bivariate analyses suggest that high MAX deciles over-perform low MAX deciles. Fama Macbeth regressions also do not support the negative relationship documented for other markets. This suggests that investors are not euphoric about lottery-like stocks in India. One may devise profitable trading strategies by going long on high MAX deciles and short on low MAX deciles.
Originality/value
This study finds a behavioral aspect of Indian investors, which seems to be in contrast to that of other countries. While there is a strong preference for lottery-like stocks in other markets, investors in India do not end up overpaying for such stocks in the market. This tendency might be an outcome of a different social and regulatory setting in India. In view of the fact that India is increasingly becoming an important investment destination, it becomes important to devise investment strategies based on the peculiarities of this market rather than simply extrapolating the findings of other markets.
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Divya Aggarwal, Uday Damodaran, Pitabas Mohanty and D. Israel
This study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity. The…
Abstract
Purpose
This study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity. The study extends Ellsberg's probability ambiguity to outcome ambiguity and examines decisions made under both ambiguities, at different likelihood levels and under the domain of gains and losses.
Design/methodology/approach
The methodology selected for this study is a two-stage within-subject lab experiment, with participants from different Indian universities. Each participant made 12 lottery decisions at the individual level and at individuals in the group level.
Findings
The results show that ambiguity attitudes are not universal in nature. Ambiguity seeking as a dominant choice was observed at both the individual level and at individual in the group level. However, the magnitude of ambiguity seeking or ambiguity aversion contingent upon the domain of gains and losses differed widely across the individual level and at individuals in the group level.
Research limitations/implications
The study enables to contribute toward giving a robust descriptive explanation for individual behavior in real-world applications of finance. It aims to provide direction for theoretical normative models to accommodate heterogeneity of ambiguity attitudes.
Originality/value
The study is novel as it examines a two-dimensional approach by representing ambiguity in probability and in outcomes. It also analyzes whether decisions under ambiguity vary when individuals make decisions alone and when they make it in groups.
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John A. Doukas and Wenjia Zhang
This study investigates the implications of the cumulative prospect theory in the context of US bank acquisitions, with particular emphasis on its probability weighting component…
Abstract
Purpose
This study investigates the implications of the cumulative prospect theory in the context of US bank acquisitions, with particular emphasis on its probability weighting component. Specifically, we examine whether gambling attitudes matter in US bank takeover decisions. The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). Overall, the results indicate that banking acquisitions are influenced by gambling attitudes.
Design/methodology/approach
To measure idiosyncratic skewness, we follow Harvey and Siddique (2000) and Kumar (2009) and decompose total skewness into its idiosyncratic and systematic components.
Findings
The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). In addition, we find that synergies and bidder announcement returns are lower in lottery‐type acquisitions. The patterns we document are stronger when bidding banks are bigger, target banks are smaller, investor sentiment is above the median, and the Chicago Fed National Activity Index is negative.
Originality/value
This is an original piece of work in the field of banking.
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Johannes Wegmann, Daniel Hermann and Oliver Musshoff
Urbanization is a main driver of the transformation from agricultural-based economies to service-based economies. At the same time, urbanization might also alter preferences and…
Abstract
Purpose
Urbanization is a main driver of the transformation from agricultural-based economies to service-based economies. At the same time, urbanization might also alter preferences and attitudes such as risk and time preferences that contribute to economic growth and foster this transition. To study the effect of urbanization, few studies have compared individual time or risk preferences in rural and urban settings, reporting mixed results. This study analyses how risk and time preferences alter along the rural–urban interface and assesses the correlation of socio-economic, socio-cultural and demographic characteristics with these preferences. Using such an approach provides insights how preferences are altered in areas of transition as the rural–urban interface mirrors different stages of urbanization.
Design/methodology/approach
Using experimental approaches, risk attitudes and time preferences of 1,117 agricultural and non-agricultural households were elicited along the rural–urban interface of the fast-developing Indian megacity Bengaluru in 2016/17. The study reports joint estimations of risk and time preferences and discusses the influence of urbanization on these preferences.
Findings
Results show that households are on average slightly risk-averse and highly impatient. The results also indicate a decline in discount rates towards rural areas while risk preferences do not considerably differ between those areas. This puzzling result may be explained by difference response of rural and urban areas to the Demonetization policy of the Indian government in 2016.
Originality/value
The research design compares jointly estimated risk and time preferences of agricultural and non-agricultural households of a rapidly urbanizing area in a low-medium income country.
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