Lottery-like stocks and the cross-section of expected stock returns in the Korean stock market
We document that stocks with extreme positive returns earn relatively lower returns in the Korean stock market. In particular, we find a negative and significant relation between MAX and subsequent stock returns, where MAX is defined as the maximum daily return over the past one month according to Bali et al. [J. Fin Econ 99 (2011) 427]. This evidence shows the presence of investors preferring stocks with lottery-like payoffs. Moreover, we find that stocks with higher MAX exhibit higher retail trading proportions (RTP), and that the negative relation between MAX and average returns is more prominent among higher RTP stocks. It is consistent with the prior literature arguing that retail investors are more likely to have the lottery-like preference.