The role of psychological barriers in lottery-related anomalies

One session options: Playing the announcement lottery?

“…The incongruity may occur because the RBA typically provides extensive policy guidance, so when analysts agree about the prospective outcome there is less likely to be a policy surprise, and it is less worthwhile purchasing a ‘lottery ticket.’ However, there is no such guidance for other macroeconomic announcements leading to a greater potential surprise and making IDO purchase more worthwhile. This is similar to the effect documented by Byun et al (2020) when investors refrain from buying lottery‐like stocks if they believe there will be no further positive surprises.…”

Expected Profitability, the 52-Week High and the Idiosyncratic Volatility Puzzle

“…For example, Liu and Zhang (2017) link the momentum effect and future growth, while George, Hwang, and Li (2018) link predictive power of the 52-week high price ratio for returns to future profit. Similar links are noted by Byun, Goh, and Kim (2020) and Kyosev et al (2020). This work suggests a connection between the IVOL effect and future profitability.…”

“…This includes Liu and Zhang (2017) who link momentum with future growth, while George, Hwang, and Li (2018) note the ability of the 52-week high price ratio to predict future returns could arise from its ability to predict future profit. Byun, Goh, and Kim (2020) find a similar result, while Kyosev et al (2020) link accounting quality and future profit that enables the former to predict future market returns. These empirical relations suggest that the IVOL effect links with future profitability and, consequently, may be the channel through which IVOL predicts future returns.…”

“…Several studies report an empirical relation between expected profitability and IVOL-related anomalies. George, Hwang, and Li (2018) suggest the predictive power of the 52-week high ratio arises from its ability to predict future profitability as well as returns, whereby stocks with high IVOL trade at a price further from its 52-week price (Byun, Goh, and Kim 2020). Empirical evidence also notes that the IVOL effect is a sentimentally driven mispricing (Stambaugh, Yu, and Yuan 2015) with the IVOL effect stronger for stock with a low 52-week high ratio and after a period of high sentiment.…”

“…4 In looking to summarise previous work, there is a general view that mispricing can arise from both market information (e.g. Byun, Goh, and Kim 2020) and fundamental news (e.g. Kyosev et al 2020).…”