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

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-ba...

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Bibliographic Details
Published inApplied economics Vol. 51; no. 50; pp. 5466 - 5481
Main Authors Chen, Guojin, Ding, Jie, Zhao, Xiangqin
Format Journal Article
LanguageEnglish
Published London Routledge 27.10.2019
Taylor & Francis Ltd
Subjects
Body fat
Chinese stock market
Economic analysis
Economic theory
Investments
Kurtosis
lottery preference
Realized kurtosis puzzle
Securities markets
Stock exchanges
stock pricing
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Summary: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.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2019.1613510