Two Essays on Lottery-Like Stocks

Essay 1: Momentum and Investors' Lottery-like Preference Previous empirical studies have consistently shown that lottery-like stocks exhibit unconditionally low average returns due to investor overreaction to extreme short-term gains. However, the results show when the momentum strategy is jointly conditioned on stocks with high maximum daily returns (MAX), high-MAX stocks yield significantly higher future returns than their low-MAX counterparts. For value-weighted portfolios, a momentum strategy applied within the high-MAX category generates an average monthly return of 2.5%, compared to only 0.25% in the low-MAX category. This return premium exceeds that of the standard momentum strategy proposed by Jegadeesh and Titman (1993). The outperformance is primarily driven by the more severe underperformance of high-MAX losers, which widens the return spread between past winners and losers. Under the MAX-momentum strategy, high- MAX winners (losers) earn average monthly returns of 1.17% (–1.33%), whereas the conventional momentum strategy yields 1.27% (0.01%) for winners (losers). Similar patterns are observed in equal-weighted portfolios. These findings indicate that high-MAX losers exhibit greater underperformance than losers in the standard momentum strategy. Essay 2: Retail Investor Influence: Robinhood Holdings and Lottery-Like Stock Performance This analysis examines the impact of retail investors' behavior on stock market prices. Many studies attribute the negative returns of lottery stocks to retail investors' activities. In this study, the returns of lottery stocks are analyzed after controlling for the activity of Robinhood investors. The findings reveal that increased participation by Robinhood investors in high lottery-like stocks leads to higher future returns compared to low lottery-like stocks, challenging previous studies that suggest these stocks typically experience lower future returns. This effect persists even after accounting for liquidity, sentiment, and earnings announcements. The results underscore the significant influence of retail investor holdings on stock market prices, particularly for small-cap stocks.