Lottery Stocks in the UK: Evidence, Characteristics and Cause

Abstract

Research across international markets identifies lottery-like stocks that contradict the standard positive risk-return trade-off paradigm. This paper, consistent with those results, reports under-performance for lottery-like stocks in the UK market. Moreover, while the under-performance appears stronger in crisis periods, it persists across all periods even when controlling for other return predictors, including size, momentum and downsize risk. However, the cause of this under-performance remains a source of debate. Our results show that a left-tail measure subsumes the UK lottery effect. This suggests under-reaction and continuation behaviour to bad news and is combined with limits to arbitrage. In addition, our findings indicate that poor lottery stock performance is partially explained by the anchoring effect and is more prevalent with greater optimism and sentiment. This contrasts with US results where reversion behaviour is reported for lottery-like stocks and supports the need for market specific research.