Market States and Lottery Preference: Evidence from Chinese Open-End Funds*

Rongxin He; Pei Lin Hsieh

doi:10.1111/ajfs.12437

Market States and Lottery Preference: Evidence from Chinese Open-End Funds*

Rongxin He, Pei Lin Hsieh

Department of Finance

Research output: Contribution to journal › Article › peer-review

Abstract

Recent studies find that investors prefer funds with lottery-like payoffs. Using a sample of Chinese open-end funds, we show that investors' preference for funds' extreme positive payoffs (MAXs) depend on the state of the market: it is significant for MAXs in an unfavorable market but weak or reversed for those in a favorable market. Such state-dependent preference is irrational because, inconsistent with the flow–MAX relationship, higher MAXs under market downturns are associated with worse performance. We further document support for the salience-theory-based explanation for investors' preference and provide counter-evidence for alternative mechanisms based on rational choice or changes in aggregate flows.

Original language	English
Pages (from-to)	678-706
Number of pages	29
Journal	Asia-Pacific Journal of Financial Studies
Volume	52
Issue number	5
DOIs	https://doi.org/10.1111/ajfs.12437
State	Published - Oct 2023

Keywords

G02
G11
G23
Lottery preference
Maximum return
Open-end funds
Salience theory
State-dependent

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10.1111/ajfs.12437

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title = "Market States and Lottery Preference: Evidence from Chinese Open-End Funds*",

abstract = "Recent studies find that investors prefer funds with lottery-like payoffs. Using a sample of Chinese open-end funds, we show that investors' preference for funds' extreme positive payoffs (MAXs) depend on the state of the market: it is significant for MAXs in an unfavorable market but weak or reversed for those in a favorable market. Such state-dependent preference is irrational because, inconsistent with the flow–MAX relationship, higher MAXs under market downturns are associated with worse performance. We further document support for the salience-theory-based explanation for investors' preference and provide counter-evidence for alternative mechanisms based on rational choice or changes in aggregate flows.",

keywords = "G02, G11, G23, Lottery preference, Maximum return, Open-end funds, Salience theory, State-dependent",

author = "Rongxin He and Hsieh, {Pei Lin}",

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AU - Hsieh, Pei Lin

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N2 - Recent studies find that investors prefer funds with lottery-like payoffs. Using a sample of Chinese open-end funds, we show that investors' preference for funds' extreme positive payoffs (MAXs) depend on the state of the market: it is significant for MAXs in an unfavorable market but weak or reversed for those in a favorable market. Such state-dependent preference is irrational because, inconsistent with the flow–MAX relationship, higher MAXs under market downturns are associated with worse performance. We further document support for the salience-theory-based explanation for investors' preference and provide counter-evidence for alternative mechanisms based on rational choice or changes in aggregate flows.

AB - Recent studies find that investors prefer funds with lottery-like payoffs. Using a sample of Chinese open-end funds, we show that investors' preference for funds' extreme positive payoffs (MAXs) depend on the state of the market: it is significant for MAXs in an unfavorable market but weak or reversed for those in a favorable market. Such state-dependent preference is irrational because, inconsistent with the flow–MAX relationship, higher MAXs under market downturns are associated with worse performance. We further document support for the salience-theory-based explanation for investors' preference and provide counter-evidence for alternative mechanisms based on rational choice or changes in aggregate flows.

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JO - Asia-Pacific Journal of Financial Studies

JF - Asia-Pacific Journal of Financial Studies

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Market States and Lottery Preference: Evidence from Chinese Open-End Funds*

Abstract

Keywords

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