Lottery demand, weather and the cross-section of stock returns

Abstract

We investigate the role that weather-induced mood plays in underperformance of lottery stocks. We hypothesize that during pleasant weather conditions, investors are more likely to become risk-taking and optimistic, and invest more in lottery stocks. This results in overpricing and lower expected return for these stocks. We use sky cloud cover as a proxy for the weather condition and show that the MAX effect mainly exists following sunny weather; however, there is less evidence for the MAX anomaly following cloudy weather. Our finding is robust to using alternative constructions of MAX and skewness measures as well as other proxies for weather condition such as rain, wind and temperature.