Do the rich gamble in the stock market? Low risk anomalies and wealthy households

Bali, Turan G. and Günaydın, A. Doruk and Jansson, Thomas and Karabulut, Yigitcan (2023) Do the rich gamble in the stock market? Low risk anomalies and wealthy households. Journal of Financial Economics, 150 (2). ISSN 0304-405X

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Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks predominantly held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that social status concern of rich households and the induced lottery preference explain wealthy investors’ demand for high-risk stocks, leading to overpricing and low future returns for such stocks.
Item Type: Article
Uncontrolled Keywords: Idiosyncratic volatility; Individual investors; Lottery stocks; Low risk anomalies; Skewness preference; Social status; Wealthy investors
Divisions: Sabancı Business School
Depositing User: A. Doruk Günaydın
Date Deposited: 04 Oct 2023 20:29
Last Modified: 04 Oct 2023 20:29

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