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Institutional trading, investor sentiment, and lottery‐like stock preferences

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  • Dallin M. Alldredge

Abstract

This paper explores the time‐varying institutional investor preference for lottery‐like stocks. On average, institutional investor holdings reflect an aversion to lottery‐like stocks. However, I find that an institutions’ aversion to lottery‐like stocks is reduced when investor sentiment is low. Moreover, I find that during low sentiment periods, institutional investors have abnormally high trading profits in more positively skewed stocks. These results suggest that institutions reduce their aversion toward lottery‐like stocks during low sentiment periods to profitably trade in lottery‐like stocks.

Suggested Citation

  • Dallin M. Alldredge, 2020. "Institutional trading, investor sentiment, and lottery‐like stock preferences," The Financial Review, Eastern Finance Association, vol. 55(4), pages 603-624, November.
    • Handle: RePEc:bla:finrev:v:55:y:2020:i:4:p:603-624
    DOI: 10.1111/fire.12231
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    3. Lee A. Smales & Zhangxin (Frank) Liu & Cameron D. Robertson, 2022. "One session options: Playing the announcement lottery?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 192-211, February.
    4. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "Stock splits and retail trading," The Financial Review, Eastern Finance Association, vol. 57(4), pages 731-750, November.
    5. Lee, Jong Hwa & Sung, Taeyoon & Seo, Sung Won, 2022. "Investor sentiment, credit rating, and stock returns," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1076-1092.
    6. Caglayan, Mustafa O. & Lawrence, Edward & Reyes-Peña, Robinson, 2023. "Hot potatoes: Underpricing of stocks following extreme negative returns," Journal of Banking & Finance, Elsevier, vol. 149(C).
    7. Asgar Ali & K. N. Badhani, 2023. "Downside risk matters once the lottery effect is controlled: explaining risk–return relationship in the Indian equity market," Journal of Asset Management, Palgrave Macmillan, vol. 24(1), pages 27-43, February.
    8. Xiao Han & Nikolaos Sakkas & Jo Danbolt & Arman Eshraghi, 2022. "Persistence of investor sentiment and market mispricing," The Financial Review, Eastern Finance Association, vol. 57(3), pages 617-640, August.
    9. Xudong Fu & Janet Hamilton & Qin Lian & Tian Tang & Qiming Wang, 2021. "New institutional investors in the IPO secondary market: Sentiment or fundamentals?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(2), pages 299-341, June.
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    11. Mustafa O. Caglayan & Umut Celiker & Gokhan Sonaer, 2022. "Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns," The Financial Review, Eastern Finance Association, vol. 57(3), pages 663-689, August.

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