The price momentum of lottery tickets
As long-time readers know, I like to analyse momentum effects and find ways to improve momentum strategies since they tend to be prone to momentum crashes.
In 2026, Reihaneh Haghighi Zadeh conducted a study that examined which stocks drive the momentum effect by dividing US stocks based on two contrasting factors. One factor was the price momentum of stocks, which was measured using the previous 12 months' share price return compared to the previous month's return. The other factor was the stocks' lottery-like payoffs, characterized by rare high returns mixed with frequent low or negative returns.
These lottery stocks tend to underperform in the long run due to investor behavior of buying them in anticipation of a rare rally, driving up prices, and then losing out when share prices return to normal.
Zadeh's research revealed that stocks with lottery-like features exhibit a more pronounced momentum effect compared to the average stock. In her sample, past winners with lottery-like features had an annualized return of 15.0%, which is virtually identical to the winners in the traditional momentum strategy. However, the losers with weak past price momentum and lottery-like features suffered annualized returns of -14.8%, resulting in a significant loss when momentum turned.
This finding suggests that lottery-like stocks are more prone to crashing badly and for an extended period when momentum shifts, thereby potentially contributing to market-wide momentum crashes.
Written by urgent.news from Klement on Investing's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
