Substitution Effects and Lottery Demand
Garcia Ares, P; Zapatero, F; Filippou, I
Date: 23 March 2018
Publisher
University of Exeter
Abstract
In this paper we examine the role of option trading in strategies with lottery-like payoffs. We find that lottery investors are more involved in the options market than the stock market. This is reflected in the insignificant payoffs of lottery stocks during the recent period. We show that there is a substitution effect between options ...
In this paper we examine the role of option trading in strategies with lottery-like payoffs. We find that lottery investors are more involved in the options market than the stock market. This is reflected in the insignificant payoffs of lottery stocks during the recent period. We show that there is a substitution effect between options with high moneyness (i.e. lottery options) and stocks with high past skewness or past daily maximum returns (i.e. lottery stocks). Consistently with theoretical information-based models, we find that gamblers tend to substitute lottery options with lottery stocks only when embedded leverage of out-of-the money options is low.
Finance and Accounting
Faculty of Environment, Science and Economy
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