Preferences for lottery stocks at Borsa Istanbul

Abstract

We investigate the existence of lottery-like preferences of investors at Borsa Istanbul. Proxying these preferences with demand for stocks with extreme positive returns (“MAX”), we establish that high-MAX stocks’ significantly underperform low-MAX stocks, controlling for a series of potential explanatory return characteristics. We find that the negative relationship between MAX and expected returns is driven by stocks strongly preferred by individual investors and strengthens following periods of high investor sentiment. A natural experiment suggests that the MAX discount increased during the period of temporary short-sale restrictions at Borsa Istanbul. Our findings suggest a limits-to-arbitrage explanation for the MAX anomaly.