Idiosyncratic skewness, gambling preference, and cross-section of stock returns: Evidence from China

By using evidence of the pricing of idiosyncratic skewness (IS), which can represent gambling preferences, our paper finds that the Chinese stock market has a significant gambling pricing anomaly of "higher IS and lower subsequent returns". Moreover, this paper discusses the reasons for this strong gambling atmosphere in the Chinese market. We find that (1) individual investor attention and trading behavior are important drivers of gambling behavior and that (2) in addition to the irrational behavior of individual investors, arbitrage restrictions in the market may further exacerbate this gambling atmosphere. Therefore, our study suggests that to increase the markers efficiency, market regulators should strengthen the appropriate guidance and management for individual investors and consider relaxing additional arbitrage limits.