Investors’ Gambling Preference:A Study Based On Hong Kong Warrants Market

Traditional financial theory is that investors are rational,under the assumption that people should not engage in gambling game,the zero and even negative and would only be in the expected return of investment,such as all kinds of investment with the development of social economy and securities products produce positive risk premium.But the reality is that people in daily life have a strong interest in buying lottery tickets and other gambling activities,which is contrary to the traditional theory of expected utility.The perspective proposed by the psychologists Kahneman and Tversky(1979)explains that people tend to overestimate the decision-making weight of small probability events,thus making their decision behavior deviate.In real life,people will have a cognitive and emotional bias,thinking that they are always lucky,and that the subjective value of giving a small probability event is far more than the objective value.It is impossible for people to be completely rational as the traditional financial theory assumes,but only limited rationality under certain circumstances,which will result in the gambling behavior.In recent years,more and more studies have also found that in financial markets,some securities products also show the characteristics of similar lotteries,that is,they can achieve high returns with a smaller probability.It is found by Li,Subrahmanyam and Yang(2018)that issuers may cater for investors’ gambling preferences and earn substantial profits by issuing derivative securities with lottery characteristics.Inspired by this,the purpose of this paper is to explore whether investors will show obvious preference to the contract with lottery characteristics in the warrant market,and how the preference will affect the investment decisions and investment returns.Hong Kong warrant market provides valuable data samples for investors to study gambling preference.The leverage and nonlinear returns of warrants contracts have significant lottery properties.Secondly,the Hong Kong warrant market is one of the earliest warrants market,and is also the most active mature market in the world.It can provide a very rich and complete data sample.In addition,the system of Hong Kong warrant market requires that the issuer can only be a listed company or a financial institution,and the ordinary investor cannot be short.This feature is very convenient for the study of the earnings of the warrants.Therefore,on the basis of the behavioral finance theory,this paper makes an empirical study on the investors’ gambling preference by using the warrant transaction data provided by the Hong Kong stock exchange.In particular,this paper focuses on the preference of investors on skewness,because the positive bias of the yield of securities products is the characteristic of obtaining high returns with small probability.The specific calculation method is mainly used to refer to the Ex Ante Skewness proposed by Boyer and Vorkink(2014).The study found that investors tend to hold warrants with low,high volatility and high skewness,especially for those with larger trading volumes.In addition,because moneyness is one of the important features of the warrant,this paper also constructs two variables to depict the deviation of at-the-money and the degree of out-of-the-money.It is found that deep out of the money warrants are highly skewness,and investors show stronger preference for out of the money warrants.Finally,this paper studies the effect of gambling preference on investment returns.It is found that the return of high skewness warrant may be slightly higher than the low skewness warrant in the short term,but in the long run,the high skewness warrant returns lower.In the sample period,issuers made a total profit of HK $6.292 billion(about RMB 50.44 billion)through issuing and trading warrants.Through the OLS regression analysis of the daily income and the warrant characteristics,we find the more the warrants with the high bias and the deep level,the higher the profit of the issuer,which indicates that the investors’ investment with lottery property will suffer more loss,that is,the gambling preference has a negative impact on the investment income.With the gradual improvement of China’s financial market,the pace of financial product innovation is also accelerating.The research on the behavior of the financial derivatives is not only helpful to guide investors to make more rational investment decisions,but also help the regulatory authorities to understand the characteristics of investors’ behavior and the possible risks that the financial innovation products may bring,so as to make more reasonable trading system,standardize the rational operation of the market,to prevent the occurrence of excessive speculation in the market,reduce the market and create a more healthy and orderly market environment.