How Do Financial Market Outcomes Affect Gambling?

Cyrus A. Ramezani () and James J. Ahern
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Cyrus A. Ramezani: Finance Department, Orfalea College of Business, California Polytechnic State University, San Luis Obispo, CA 93407, USA
James J. Ahern: Agribusiness Department, CAFES, California Polytechnic State University, San Luis Obispo, CA 93407, USA

JRFM, 2023, vol. 16, issue 6, 1-25

Abstract: A large literature in behavioral finance explores how gambling sentiments influences trading in stocks. This paper considers the reverse phenomena; the impact of financial market outcomes on aggregate gambling expenditures. We expect the wealth effect of higher realized stock returns will increase gambling (entertainment good). Similarly, we expect rising volatility will attract gamblers to equity markets seeking thrill and skewed payouts. Utilizing novel horse wagering data (1934–2020), we study the impact of these forces on gambling expenditures. Using corporate bond spreads as a proxy for business cycles, we find that, in addition to financial market outcomes, price of wagering, incomes, and availability of competing betting products are important drivers of gambling. We also find that, ceteris paribus, gambling rises during recessions. Our findings will be of interest to policy makers and the finance industry, particularly as day trading, sports betting, online casinos, and other gambling gains broad public acceptance.

Keywords: realized risk premium; market volatility; stock market’s wealth effect; gambling demand; racetrack gambling; conditional elasticity (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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