Natural Experiments on Individual Trading: Substitution Effect Between Stock and Lottery
We take advantage of multiple natural experiments of large jackpot size lotteries in Taiwan and document a substitution effect between individual investor trading and lottery buying. The number of shares traded by individual investors decreases by 5.9% when the jackpot size exceeds 500 million Taiwan dollars. This substitution effect is both economically and statistically significant. We also find that the magnitude is monotonically increasing with the jackpot size. Furthermore, this substitution effect is stronger among stocks with high individual trading fraction, small market capitalization, low price, high past return and turnover, and high idiosyncratic volatility. We attribute this substitution effect to behavioral trading needs of individual investors, such as entertainment, sensation seeking, and gambling.
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