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A lottery-preference-based explanation of realized kurtosis puzzle in Chinese stock market

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  • Guojin Chen
  • Jie Ding
  • Xiangqin Zhao

Abstract

High kurtosis corresponds to fat tails on both sides and under risk-aversion assumption investors’ dislike of left-tail loss outweighs their preference for right-tail gain. Therefore, high kurtosis characteristic of stock should predict high expected returns. However, the high-frequency-data-based empirical results on Chinese stock market are just the opposite, which we refer to as the ‘realized kurtosis puzzle’. Using the double sorts and firm-level cross-sectional regression methods, we further demonstrate investors’ preference for lottery-like stocks or lottery preference is key to solve the puzzle. Our further empirical research verifies stocks with higher retail investors’ shareholding proportion and unavailable for short show stronger ‘realized kurtosis puzzle’. In addition, the puzzle is particularly significant in high lottery preference periods while less apparent in low lottery preference times.

Suggested Citation

  • Guojin Chen & Jie Ding & Xiangqin Zhao, 2019. "A lottery-preference-based explanation of realized kurtosis puzzle in Chinese stock market," Applied Economics, Taylor & Francis Journals, vol. 51(50), pages 5466-5481, October.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:50:p:5466-5481
    DOI: 10.1080/00036846.2019.1613510
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    Cited by:

    1. Malinská, Barbora, 2022. "Time-varying pricing of risk in sovereign bond futures returns," Finance Research Letters, Elsevier, vol. 47(PA).
    2. Eran Rubin & Amir Rubin, 2021. "On the economic effects of the text completion interface: empirical analysis of financial markets," Electronic Markets, Springer;IIM University of St. Gallen, vol. 31(3), pages 717-735, September.
    3. Seema REHMAN & Saqib SHARIF & Wali ULLAH, 2021. "Higher Realized Moments and Stock Return Predictability," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 48-70, December.

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