Time-dependent lottery preference and the cross-section of stock returns

Chaonan Lin, Hong-Yi Chen, Kuan-Cheng Ko and Nien-Tzu Yang

Journal of Empirical Finance, 2021, vol. 64, issue C, 272-294

Abstract: Highlighting the importance of benchmark to identify lottery-like payoffs of stocks, this study proposes that investors’ lottery preference is formed toward tracking stocks’ performance over time. Accordingly, we develop a strategy based on time-dependent maximum daily return (denoted as TMAX) by buying (short selling) stocks with the most recent maximum daily returns (MAX) ranked in the bottom (top) decile of the historical distribution. The TMAX strategy generates significant premium that subsumes the profitability of Bali, Cakici, and Whitelaw’s (2011) MAX strategy, but not vice versa. A major advantage of the TMAX strategy is its time-invariant profitability across different periods and sentiment states. Further analyses show that the TMAX premium can be explained by shorting flow and behavioral theories, supporting the time-dependent feature of lottery preference.

Keywords: Lottery preference; Time dependence; Maximum daily returns; Stock returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:64:y:2021:i:c:p:272-294

DOI: 10.1016/j.jempfin.2021.09.005

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