The Effect of Gambling Preference on Stock Volatility: From the Evidence of Looser Price Limits Regulation

Abstract

ABSTRACT This article explores the intricate relationship between gambling preferences and stock market dynamics, with a focus on the repercussions of a more lenient price limit regulation. Specifically, we examine the effects of expanding the price limit range from 10% to 20% for stocks listed on the second board market of the Shenzhen Stock Exchange. Employing a difference-in-differences methodology for causal inference, our research reveals a notable surge in price volatility, particularly evident among lottery stocks. To validate these findings, we employ various statistical techniques, including propensity score matching tests, parallel trend hypothesis tests, placebo tests, and alternative volatility measurements. Our study unveils that looser price limits contribute to heightened stock price volatility through two primary channels: the inherent lottery characteristics of certain stocks and the increased attention from retail investors. Moreover, we identify that the amplified volatility is more pronounced within non-state-owned enterprises and small-cap entities. In summary, our results indicate that price limits play a crucial role in stabilizing emerging stock markets by mitigating the gambling tendencies of retail investors. This research sheds light on the positive aspects of price limits regulation, offering valuable insights for market policymakers and participants alike.