Lottery Preference and Anomalies

Dr. Yifeng Zhu is now working as Associate Professor in Finance with Tenure at School of Finance, Central University of Finance and Economics. His research fields are asset pricing and applied econometrics. Dr. Zhu has published multiple well-known finance journals such as Journal of Financial and Quantitative Analysis and Journal of Empirical Finance as the sole corresponding author. He received his bachelor’s degree in Applied Mathematics from Tongji University and two master degrees in Math and Statistics from Shanghai Jiao Tong University and Georgetown University. He graduated from Emory University with PhD degree in Economics.

We construct a lottery factor based on 13 commonly used lottery proxies and show that this factor adds significant explanatory power to prominent factor models for anomalies, especially for those in the skewness and value groups. We find that anomaly returns are significantly stronger among stocks with high lottery features and are mainly driven by the short leg of lottery stocks instead of financial distress. We find further that lottery stocks are often associated with low short volume and high shorting fees, indicating that retail investors' preference to hold lottery stocks leads to a low lendable supply of such shares.