Abstract
We find that short interest-related mispricing is strongest among stocks with the most lottery-like characteristics, which are preferred by retail investors. Negative alphas for high relative short interest (RSI) stocks and positive alphas for low RSI stocks are monotonically related to stocks’ lottery features. Monthly portfolio alphas are –1.61% for stocks with high RSI and most lottery-like characteristics, while stocks with high RSI and the least lottery-like attributes show statistically insignificant alphas. Among lightly shorted stocks, lottery securities exhibit monthly alphas of 1.80%. Thus, although lottery stocks as a group typically underperform, investors can earn positive abnormal returns in lottery stocks with low RSI. Our results suggest that higher transactions costs among lottery stocks impedes arbitrage in short interest-related mispricing, particularly for low RSI stocks.
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