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Gambling Preferences, Options Markets, and Volatility

Published online by Cambridge University Press:  02 May 2016

Benjamin M. Blau ,
T. Boone Bowles  and
Ryan J. Whitby
Benjamin M. Blau*
Affiliation:
[email protected], Utah State University, Huntsman School of Business, Logan, UT 84322
T. Boone Bowles
Affiliation:
[email protected], University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Chapel Hill, NC 27599.
Ryan J. Whitby
Affiliation:
[email protected], Utah State University, Huntsman School of Business, Logan, UT 84322
*
*Corresponding author: [email protected]
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Abstract

This study examines whether the gambling behavior of investors affects volume and volatility in financial markets. Focusing on the options market, we find that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries. Consistent with the theoretical predictions of Stein (1987), we demonstrate that gambling-motivated trading in the options market influences future spot price volatility. These results not only identify a link between lottery preferences in the stock market and the options market, but they also suggest that lottery preferences can lead to destabilized stock prices.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 515 - 540
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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