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Abstract This study constructs a Chinese lottery index (LI) based on six popular lottery preference variables by using the partial least squares method and examines the relationship between the LI and future stock market returns during the period from January 2000 to December 2021. We find that the LI can negatively predict stock market excess returns in‐sample and out‐of‐sample. In addition, the LI can generate a large economic gain for a mean–variance investor. Finally, the predictive sources of the LI stem from a cash flow channel and can be explained by the positive volume–volatility relationship and investor attention.
Zhang et al. (Sun,) studied this question.