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Option-implied lottery demand and IPO returns

Author

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  • Dierkes, Maik
  • Krupski, Jan
  • Schroen, Sebastian

Abstract

We study the impact of time-varying lottery demand on first-day returns and the poor long-term performance of IPOs. Lottery demand – measured in terms of option-implied probability weighting – is associated with significantly higher first-day returns, tantamount to higher IPO underpricing and more money left on the table. Interacting the time variation in lottery demand with cross-sectional expected skewness reveals that IPO returns are particularly driven by the interaction between market-wide lottery demand and asset-specific lottery characteristics. When expected skewness meets low lottery demand, there is virtually no effect of skewness on first-day returns. In the long run, IPOs issued in high lottery demand regimes are more likely to perform poorly for up to five years after the IPO.

Suggested Citation

  • Dierkes, Maik & Krupski, Jan & Schroen, Sebastian, 2022. "Option-implied lottery demand and IPO returns," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:dyncon:v:138:y:2022:i:c:s0165188922000616
    DOI: 10.1016/j.jedc.2022.104356
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    More about this item

    Keywords

    IPO; Lottery demand; Skewness preferences;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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