Investor Gambling Preference And Asset Pricing

In traditional financial theory,investors choose their portfolios only according to the expected return and risk.However,many empirical research results show that investors have obvious investment bias in asset allocation due to physiological,psychological,knowledge structure and social background influences.Gambling preference is an important investment bias.Many investors hope to gain extreme profits by investing in stocks.Like gambling,buying and selling fast and having a high turnover rate are the behavioral styles of these investors.Consequently,for a long time,the Chinese stock market was imperfect,and market inefficiency was high.There are obvious market characteristics of high volatility,a high P/E ratio and a high turnover rate in the stock market.Therefore,to reduce the adverse effects of investors’ gambling investment behavior,to guide investors to invest rationally and to promote the healthy development of the market,it is necessary to understand the motivation and market outcomes of investors’ gambling behavior.Unfortunately,although some previous studies explore the pricing effect of“lottery-like stocks” in the Chinese market,these studies do not discuss in depth the driving factors of investors’ gambling behavior,trading characteristics or the underlying reasons for the strong gambling atmosphere of the Chinese stock market.In addition,existing scholarly analyses of the gambling preference for “policy-related stocks”—the preference for which is an important gambling preference among stock market investors—are deficient.With the above background and taking investors’ gambling preference under limited rationality as the starting point,this paper focuses on the gambling preference for lottery-like and policy-related stocks.The related trading behavior,corresponding market consequences and internal economic mechanism are deeply discussed in this paper.The specific conclusions of this paper are as follows.In the first part of this paper,idiosyncratic skewness,which is a concept from“skewness preference theory”,is used to measure investors’ gambling preference for lottery-like stocks.This part deeply explores the gambling behavior and trading characteristics of investors in the Chinese stock market.In addition,the underlying reasons for the strong gambling atmosphere of the Chinese stock market are discussed in this part.This part finds that there is an obvious gambling phenomenon in the Chinese market.Furthermore,using social media data(Baidu search data,Sina News data and Hexun News data),this part constructs an individual investors’ attention index.In addition,this part uses the “Dragon and Tiger list” as the exogenous attention-grabbing event of individual investors and uses high-frequency trading data to construct the trading aggressiveness of individual investors.With the above measures,this part finds that investor attention is an important driving factor in individual investors’ gambling behavior,and the subsequent individual investors’ aggressive trading is the main internal channel.Finally,using the relevant factors of the trading mechanism and stock characteristics,this part constructs comprehensive limits of arbitrage index.The results show that the higher arbitrage restrictions in the Chinese market may further stimulate the gambling preference of investors,thus intensifying the gambling atmosphere of the market.In the second part,this paper uses the maximum stock daily return(MAX)as a more direct measure of investors’ gambling preference for lottery-like stocks.This part analyzes the underestimation of the gambling effect caused by the price-limit rule and the inside economic mechanism.This part finds that due to the existence of the price limit,after stock returns reach the upper price limit,the MAX factor does not fully reflect the investors’ sentiment and relevant trading information,so the real gambling effect may be underestimated.To determine this,this part calculates the modified MAX(RMAX)factor,which can fully reflect the relevant information.The results show that using RMAX as a new measure of investors’ gambling preference can capture stronger gambling behavior.Subsequently,this part also explores the economic mechanism behind the MAX factor’s underestimation of the gambling effect.For the above purpose,the Baidu search volume is used to capture individual investors’ attention,investors’ social forum data(reflected by the Eastmoney stock forum)are used to capture investment sentiment,and high-frequency trading data are used to construct the trading indicators of individual investors.Using the above indicators,this part finds that when stock returns reach the daily upper price limit,both investors’ attention and the corresponding gambling sentiment will be aroused,and then more individual investors will trade aggressively.However,the original MAX factor cannot capture the corresponding change in sentiment and trading,thus resulting in the underestimation of the gambling effect.In the third part,this paper uses individual stocks’ exposure to economic policy uncertainty to describe investors’ gambling preference for policy-related stocks and explores the related speculation behavior of individual investors and the market consequences of this behavior in detail.This part finds that individual investors show a high gambling preference for economic policy uncertainty,and the corresponding speculation impedes price discovery efficiency.The trading aggressiveness index of individual investors described by high-frequency trading data shows that speculative trading of individual investors is the main economic mechanism that impedes price discovery efficiency.In addition,this part also conducts many heterogeneity tests on stock characteristics(high liquidity,high attention,and high positive information shock)and market states(UP market,high sentiment and lunar new year)that more easily stimulate investors to gamble.The results show that investors do speculate more aggressively.Finally,combined with the impact of exogenous laws and the changes in the development of the capital market(cancellation of short-selling constraints and the development of the analyst market),this part finds that relevant policy speculation is weakened in a more developed and transparent market environment.Overall,this study effectively helps achieve a more comprehensive understanding of gambling behavior in the Chinese stock market.More importantly,this paper innovatively uses high-frequency trading data,social media data,and online search data;deeply discusses the internal mechanism of investors’ gambling preferences;and explores the trading characteristics of investors’ gambling behavior.The above results significantly help achieve a deeper understanding of investors’ gambling behavior and internal mechanisms.In addition,this paper also analyzes gambling behavior in the Chinese stock market in terms of several institutional factors.The exploration of relevant institutional factors provides a reference for a more comprehensive understanding of the heavy gambling atmosphere of the Chinese market.Moreover,the analysis of the related institutional factors and the reform of the trading mechanism can also provide important theoretical support for further reducing gambling behavior and guiding the reasonable development of the stock market.