Gambling Sentiment and Aggregate Stock Returns

This study proposes a new measure of investor sentiment – gambling sentiment index that captures a unique dimension of broader investor sentiment – and examines its predictability for future market returns. We construct a gambling sentiment index by aggregating firm-level predicted jackpot probability, motivated by recent theoretical models in which investors have gambling preference. We find that gambling sentiment index significantly and negatively predicts subsequent excess market returns both in and out of sample. Further, gambling sentiment index generates sizable utility gains for a mean-variance investor who allocates between equities and risk-free asset. Overall, our results suggest that high gambling sentiment gives rise to speculative market overvaluation, yielding low future market returns as overpricing will be corrected