Lottery-type stocks in Brazil Evidence from a survivorship-bias-corrected universe
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Abstract
I examine the pricing implications of lottery-type stock characteristics in Brazil’s equity market (B3) over the period 2002–2024, a setting that differs markedly from the United States in institutional development, retail investor participation, and macroeconomic volatility. Following an established lottery-stock identification framework—classifying stocks as “lottery” if they simultaneously fall below the median in price, above the median in idiosyncratic volatility, and above the median in return skewness (LSCORE = 3)—I document a result consistent with prior U.S. evidence: lottery stocks in Brazil underperform the strict LSCORE = 0 benchmark portfolio by −1.259% per month (−14.11% annually) on a Carhart four-factor risk-adjusted basis (t = −5.75, p < 0.001), with |t| above the 3.0 threshold. The discount remains economically and statistically significant under a Carhart-plus-IML five-factor specification (α = −1.249% per month, t = −5.70), is negative in each of four non-overlapping subperiods (2002–2008, 2009–2015, 2016–2019, 2020–2024), and is concentrated among less liquid stocks where arbitrage is costliest. A key methodological contribution is to quantify the selection induced by a continuously observed-firms filter: restricting the universe to firms that report returns in every calendar year of the sample inflates the lottery alpha by approximately 0.37 percentage points per month, attenuating the estimated discount by roughly 30%. These findings are consistent with cumulative prospect theory and limits-to-arbitrage theory.
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References
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