Playing the market: Lottery stock and bitcoin comovement

We examine the impact of a stock's lottery-likeness on its return comovement with Bitcoin. We find that Bitcoin returns exhibit significantly stronger comovement with lottery-like stocks (LLS). Using firms' retail ownership and Robinhood user details to proxy for retail trading, we identify that retail investors' preference for speculative, high-risk, and high-reward investments, known as their gambling propensity, is the underlying channel driving the Bitcoin-LLS comovement. Our results are robust across various estimation methods, alternative measures of stock lottery-likeness, and multiple proxies for gambling sentiment including Google search volume, Baker-Wurgler sentiment index, the month of January, and the period around the Chinese Lunar New Year. These findings hold at both daily and monthly intervals and are not confounded by firms in the high-tech industry. Further analysis using Robinhood and Bitcoin users' net trading positions yields consistent evidence. Employing a vector autoregressive approach and an exogenous shock to Bitcoin demand, we demonstrate a spillover effect from Bitcoin to LLS. Finally, we demonstrate that Bitcoin provides more effective hedge for LLS than non-LLS.