Upper price limit, lottery preference, and cross-section of stock returns: evidence from the Chinese stock market

This study proposes upper-price-limit hits (UPL) as a novel China-specific proxy for lottery preference to explain cross-sectional stock returns. Stocks with high UPL frequency significantly underperform their low-UPL-frequency counterparts, even after accounting for common risk and lottery factors. Notably, UPL retains its return-predictive power when controlling for established lottery-related characteristics – skewness, idiosyncratic volatility, maximum daily returns, and prospect theory value – and is not subsumed by salience or chronological ordering effects. These findings confirm UPL’s unique capacity to capture investors’ preference for extreme payoffs, establishing it as a market-tailored metric for lottery-like stocks and advancing research at the intersection of price limits and behavioural asset pricing.