Arbeitspapier

Lottery loans in the eighteenth century

In the 18th century Britain frequently issued lottery loans, selling bonds whose sizewas determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these observations and estimate the equilibrium model of Barberis and Huang (2008). The preference parameters can account for the level of the lottery premium but cannot always match the systematic rise of prices over the course of the draws.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 2018-07

Classification
Wirtschaft
Criteria for Decision-Making under Risk and Uncertainty
Asset Pricing; Trading Volume; Bond Interest Rates
Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Europe: Pre-1913
Subject
lotteries
behavioral finance
cumulative prospect theory
Great Britain
government debt

Event
Geistige Schöpfung
(who)
Velde, François R.
Event
Veröffentlichung
(who)
Federal Reserve Bank of Chicago
(where)
Chicago, IL
(when)
2018

DOI
doi:10.21033/wp-2018-07
Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Velde, François R.
  • Federal Reserve Bank of Chicago

Time of origin

  • 2018

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