TAILIEUCHUNG - Do investors buy lotteries in China’s stock market?

Motivated by existing evidence of individual investors’ gambling preference in . stock market (Kumar, 2009), this paper investigates characteristics of lottery-type stocks and individuals’ gambling preference in China’s stock market. Based on the practice situation of China’s stock market, this paper improves existing classification method and defines the lottery-type stocks as stocks with high MAX, high turnover rate, and low price. We show some unique characteristics of lottery-type stocks in China’s stock market. The distribution of lottery-type stocks in different industries is unbalanced, and the “lottery” feature is not permanent. The empirical results indicate that individual investors overweight stocks with lottery features in China’s stock market. Further, we find that individual investors exhibit a stronger gambling preference in the bull market. | Journal of Applied Finance Banking vol. 6 no. 5 2016 89-106 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2016 Do Investors Buy Lotteries in China s Stock Market Yu Liang1 and Weiqiang Zhang2 Abstract Motivated by existing evidence of individual investors gambling preference in . stock market Kumar 2009 this paper investigates characteristics of lottery-type stocks and individuals gambling preference in China s stock market. Based on the practice situation of China s stock market this paper improves existing classification method and defines the lottery-type stocks as stocks with high MAX high turnover rate and low price. We show some unique characteristics of lottery-type stocks in China s stock market. The distribution of lottery-type stocks in different industries is unbalanced and the lottery feature is not permanent. The empirical results indicate that individual investors overweight stocks with lottery features in China s stock market. Further we find that individual investors exhibit a stronger gambling preference in the bull market. JEL classification numbers G11 G12 Keywords Behavioral finance Gambling preference Lottery-type stocks Individual investors 1 Introduction For thousands of years gambling has been accompanying the development of human society from the dawn of civilization. People may want to ask that what kinds of features make gambling activities so attractive. There are lots of studies attempting to find a reasonable explanation in different research areas such as biology psychology sociology religion and economics. The most important feature of gambling activities is a very low probability to obtain a tremendous positive return which usually makes the expected return to be negative. Some researchers find that in fact human s gambling psychology and behavior exist not only in lottery games or casino but also in the investment decision process Friedman and Savage 1948 Markowits 1952 . Statman 2002 compares the stock market to

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