Stock Market Volatility and Economic Downturn: Investigating the Role of Investor Gambling Behavior during Periods of High Unemployment and inflation in Pakistan
Abstract/Description
This study investigates the relationship between lottery feature stocks, the lottery feature index, and future stock returns across different economic phases characterized by high or low unemployment rates, economic growth, and inflation expectations. Monthly data from December 2000 to December 2023 was collected from DataStream and the official website of the State Bank of Pakistan. The analysis focuses on common stocks traded on the Pakistan Stock Exchange during this period, utilizing the Fama-French six-factor model to examine how lottery-like characteristics in stocks influence future returns.
The study posits that stocks exhibiting stronger lottery-like features tend to underperform in terms of future returns, particularly during adverse macroeconomic conditions such as high unemployment and elevated inflation expectations. To test this conjecture, the top and bottom 30 percentiles of stocks were analyzed based on their lottery-like features, using quantile regression to assess their performance across different economic conditions. The robustness of the results was further tested through Fama-MacBeth cross-sectional regression.
The findings reveal that investing in lottery feature stocks is riskier during periods of high unemployment and inflation expectations. More specifically, future returns were more negatively associated with the overall lottery feature index, idiosyncratic volatility, and the MAX effect, with higher values of these characteristics leading to lower subsequent returns. Conversely, stocks with low or high idiosyncratic skewness performed relatively better during economic downturns.
Keywords
Lottery Feature Stocks, Gambling Behavior, Economic Downturn, Stock Market Volatility, Fama-French Six Factor Model
Track
Finance
Session Number/Theme
Finance - Session II
Start Date/Time
13-6-2025 4:30 PM
End Date/Time
13-6-2025 5:30 PM
Location
MCC – 12 AMAN CED Building
Recommended Citation
Raz, A., Ahmed, W., Sattar, A., & Nabeel Ul Haq, S. M. (2025). Stock Market Volatility and Economic Downturn: Investigating the Role of Investor Gambling Behavior during Periods of High Unemployment and inflation in Pakistan. IBA SBS 4th International Conference 2025. Retrieved from https://ir.iba.edu.pk/sbsic/2025/program/12
COinS
Stock Market Volatility and Economic Downturn: Investigating the Role of Investor Gambling Behavior during Periods of High Unemployment and inflation in Pakistan
MCC – 12 AMAN CED Building
This study investigates the relationship between lottery feature stocks, the lottery feature index, and future stock returns across different economic phases characterized by high or low unemployment rates, economic growth, and inflation expectations. Monthly data from December 2000 to December 2023 was collected from DataStream and the official website of the State Bank of Pakistan. The analysis focuses on common stocks traded on the Pakistan Stock Exchange during this period, utilizing the Fama-French six-factor model to examine how lottery-like characteristics in stocks influence future returns.
The study posits that stocks exhibiting stronger lottery-like features tend to underperform in terms of future returns, particularly during adverse macroeconomic conditions such as high unemployment and elevated inflation expectations. To test this conjecture, the top and bottom 30 percentiles of stocks were analyzed based on their lottery-like features, using quantile regression to assess their performance across different economic conditions. The robustness of the results was further tested through Fama-MacBeth cross-sectional regression.
The findings reveal that investing in lottery feature stocks is riskier during periods of high unemployment and inflation expectations. More specifically, future returns were more negatively associated with the overall lottery feature index, idiosyncratic volatility, and the MAX effect, with higher values of these characteristics leading to lower subsequent returns. Conversely, stocks with low or high idiosyncratic skewness performed relatively better during economic downturns.
