Stock loan lotteries and individual investor welfare

Jordan Moore

Review of Behavioral Finance, 2020, vol. 13, issue 5, 610-630

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: Prize-linked payoffs; Lotteries; Lottery stocks; Savings; Short selling; Securities lending; Individual investors; Financial institutions; Financial innovation; Prospect theory; Household finance; Behavioral finance (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-03-2020-0056

DOI: 10.1108/RBF-03-2020-0056

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