Lottery preferences and the idiosyncratic volatility puzzle

Chichernea, Doina; Kassa, Haimanot; Slezak, Steve L.

doi:10.1111/eufm.12178

Cited by 12 publications

(3 citation statements)

References 86 publications

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“…Additionally, Chichernea et al, (2019) analyze the role of investors' heterogeneous preferences for skewness effects to the negative correlation between idiosyncratic volatility (IVOL) and mean returns. Using data on all common stocks covered by the CRSP traded on New York Stock Exchange, American Stock Exchange, and NASDAQ, they compute institutional holdings based on 13F filings for all firms covered by the Thomson Reuters.…”

Section: Literature Reviewmentioning

confidence: 99%

Speculation and Lottery-Like Demand in Cryptocurrency Markets

Grobys

Junttila

2020

SSRN Journal

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This is the first paper that explores lottery-like demand in cryptocurrency markets. Since recent research provides evidence that cryptocurrency returns appear to be short-memory processes, we modify Bali, Cakici and Whitelaw's (2011) and Bali, Brown, Murray, and Tang's (2017) MAX measure and employ a weekly forecast horizon and daily log-returns from the previous week to calculate the metric for our portfolio sorts. From an econometric point of view, this study proposes statistical tests that are robust to unknown dynamic dependency structures in the cryptocurrency data. Our results show that average raw and risk-adjusted return differences between cryptocurrencies in the lowest and highest MAX quintiles exceed 1.50% per week. These results are robust after controlling for Bitcoin risk or potential microstructure effects. Our findings are important also from a theoretical point of view because they suggest that parallel to stock markets, similar behavioral mechanisms of underlying investor behavior are present also in new virtual currency markets.

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Section: Literature Reviewmentioning

confidence: 99%

Speculation and Lottery-Like Demand in Cryptocurrency Markets

Grobys

Junttila

2020

SSRN Journal

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“…6. See, for example, Garrett and Sobel (1999) and Walker and Young (2001). See also Aboura and Arisoy (2019), Chichernea et al (2019) and Mehra et al (2021). …”

Section: Notesmentioning

confidence: 99%

Underdiversification puzzle, volatility puzzle and equity premium puzzle: a common solution

Ardalan

2022

SEF

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Purpose The purpose of this paper is to use some of the contributions of the option pricing theory to solve three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle. Design/methodology/approach To approach the issue, this paper considers the applications of the option pricing theory to both sides of the corporate balance sheet. Applications to the left-hand side of the balance sheet has led to the real options theory that has expressed the value of a capital budgeting project as the sum of the values of its “discounted cash flow (DCF) method” and “real options.” This paper argues that, because the balance sheet must balance, the value of equity, which appears on the right-hand side of the balance sheet, should also be expressed as the sum of the values of its “DCF method” and “equity options.” Findings This proposed model of equity valuation solves the three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle. Research limitations/implications This study may not be able to explain the full extent of the three puzzles. Practical implications The dividend discount model of equity valuation needs to be augmented by an option component. Social implications The community of finance scholars will become more confident of their scholarly work because three puzzles will be solved to a great extent. Originality/value To the best of author’s knowledge, the extant literature does not either solve any single one of the three puzzles through the contributions of option pricing theory or solve all three puzzles at the same time with a single solution. The originality of this paper is that it makes both of these contributions to the extant literature.

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“…Other papers show that lottery features affect the returns of other individual assets, such as options (Boyer & Vorkink, ; Doran et al, ) and IPO returns (Green & Hwang, ). Further, Chichernea, Kassa, and Slezak () find that lottery preferences play a role in the idiosyncratic volatility puzzle. Our finding that the MAX–return relationship carries over to the performance of managed portfolios provides important reinforcement to the findings of these earlier papers.…”

Section: Introductionmentioning

confidence: 99%

Does MAX matter for mutual funds?

Goldie

Henry

Kassa

2018

Euro Fin Management

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Extreme returns (MAX) have been shown to impact future expected stock returns. We examine whether this relationship is present in mutual fund returns. We find that high MAX funds, as measured by past extreme daily returns, underperform both in portfolio sorts and cross‐sectional tests. We further test possible explanations for why MAX funds underperform. First, we measure mutual fund flows to determine investor response to MAX. Second, we examine the underlying holdings of MAX funds to measure their concentration in MAX stocks. We find evidence that both fund flows and holdings contribute to the MAX effect on mutual fund returns.

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Lottery preferences and the idiosyncratic volatility puzzle

Cited by 12 publications

References 86 publications

Speculation and Lottery-Like Demand in Cryptocurrency Markets

Speculation and Lottery-Like Demand in Cryptocurrency Markets

Underdiversification puzzle, volatility puzzle and equity premium puzzle: a common solution

Does MAX matter for mutual funds?

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