{"title":"Lottery Preference and Skewness Risk Premium: Evidence From the Chinese Market","authors":"Xianjing Zhou, Tai-Yong Roh, Yahua Xu","doi":"10.1002/fut.70012","DOIUrl":null,"url":null,"abstract":"<div>\n \n <p>This study investigates the pricing of skewness risk in cross-sectional returns in the Chinese stock market, considering the substantial presence of retail investors and their potential lottery-related preferences. We decompose the total implied skewness, derived from the Shanghai Stock Exchange 50 exchange-traded fund options, into upper and lower components. Our findings reveal that the upper implied skewness carries a significantly negative price, whereas the lower implied skewness is positively but only weakly priced. The opposite predictability resolves the pricing puzzle associated with total implied skewness, which exhibits negligible cross-sectional predictability. The negative premium associated with upper skewness is attributed to retail investors' lottery preferences, as stocks exposed to higher upper skewness risk tend to perform well during right-tail market events. This behavioral interpretation is further supported by evidence showing that the negative premium on upper implied skewness is most pronounced during high-sentiment periods, even after controlling for standard risk factors.</p>\n </div>","PeriodicalId":15863,"journal":{"name":"Journal of Futures Markets","volume":"45 10","pages":"1818-1851"},"PeriodicalIF":2.3000,"publicationDate":"2025-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Futures Markets","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1002/fut.70012","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
This study investigates the pricing of skewness risk in cross-sectional returns in the Chinese stock market, considering the substantial presence of retail investors and their potential lottery-related preferences. We decompose the total implied skewness, derived from the Shanghai Stock Exchange 50 exchange-traded fund options, into upper and lower components. Our findings reveal that the upper implied skewness carries a significantly negative price, whereas the lower implied skewness is positively but only weakly priced. The opposite predictability resolves the pricing puzzle associated with total implied skewness, which exhibits negligible cross-sectional predictability. The negative premium associated with upper skewness is attributed to retail investors' lottery preferences, as stocks exposed to higher upper skewness risk tend to perform well during right-tail market events. This behavioral interpretation is further supported by evidence showing that the negative premium on upper implied skewness is most pronounced during high-sentiment periods, even after controlling for standard risk factors.
期刊介绍：
The Journal of Futures Markets chronicles the latest developments in financial futures and derivatives. It publishes timely, innovative articles written by leading finance academics and professionals. Coverage ranges from the highly practical to theoretical topics that include futures, derivatives, risk management and control, financial engineering, new financial instruments, hedging strategies, analysis of trading systems, legal, accounting, and regulatory issues, and portfolio optimization. This publication contains the very latest research from the top experts.
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