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. And let’s face it, in 2026, momentum has been pretty much the only investment style that worked. So, maybe it’s time to look at a study of which stocks drive the momentum effect.

Reihaneh Haghighi Zadeh split US stocks along two seemingly contradictory dimensions.

On the one hand, she looked at the price momentum of stocks, splitting them in the familiar way between past winners and losers using the previous 12 months’ share price return (minus the previous month’s return). In her sample, this momentum strategy managed to create an annualised return between 1962 and the end of 2023 of 16.5% for the winners with the highest price momentum and 0.1% for the losers.

On the other hand, she split the stocks into those exhibiting lottery-like payoffs (i.e. a rare high return vs frequent low or even negative returns). We know that these lottery stocks tend to underperform in the long run because investors get tricked into buying these stocks, hoping for one of these rare rallies, and in the process bid up the price of these shares and then lose more when share prices normalise again. To identify lottery-like stocks, Zadeh uses the maximum daily return of each stock in the previous return. The higher the recent daily return, the more it resembles a lottery ticket.

But what are the momentum returns of these lottery stocks compared to other stocks that don’t show lottery-like features? The charts below give you an indication. The orange lines show the cumulative return of a momentum strategy based on lottery-like stocks, while the blue lines show the returns of a momentum strategy based on stocks that don’t show lottery-like features.

Cumulative returns of momentum strategies (value-weighted on the left, equal-weighted on the right)

It is clear that stocks with lottery-like payoffs show a much stronger momentum effect than the average stock. This isn’t driven by the winning stocks with high past price momentum. In her sample, these past winners with lottery-like features had an annualised return of 15.0%. That is pretty much the same as the winners in the traditional momentum strategy. But the losers with weak past price momentum and lottery-like features showed annualised returns of -14.8%.

Effectively, a lottery-like stock does well enough as long as it has positive price momentum, but when the momentum on these lottery stocks turns, they crash. And they crash badly and for a long time. And they are likely to be one of the sources of momentum crashes in markets.