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This study examines important aspects of lottery behavior in India using data from December 2001 to March 2021. We experiment with a new measure of lottery along with well-established measures. Our lottery measure focusing on more recent information is found to be appropriate for India. MAX has a unique role in predicting returns that is not subsumed by other risk measures. We find MAX, skewness, tail risk, and idiosyncratic volatility as relevant characteristics of lottery stocks. Using these, we construct a lottery factor representing investors' risk-seeking behavior. This behavior is an outcome of mis-weighing probability of extreme gains or losses and leads to overreaction to attention-catching events. We augment the Fama-French five-factor model with our lottery factor. Our six-factor behavioral asset pricing framework is found to be an appropriate performance benchmark. Lottery behavior is mainly the result of retail investor actions and is linked to several behavioral biases.
Sehgal et al. (Tue,) studied this question.
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