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http://ssrn.com/abstract=1777988
 
 

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Frog in the Pan: Continuous Information and Momentum


Zhi Da


University of Notre Dame - Mendoza College of Business

Umit G. Gurun


University of Texas at Dallas

Mitch Warachka


Claremont Colleges - Robert Day School of Economics and Finance

September 30, 2012

AFA 2012 Chicago Meetings Paper

Abstract:     
We develop and test a frog-in-the-pan (FIP) hypothesis that predicts investors are less attentive to information arriving continuously in small amounts than to information with the same cumulative stock price implications arriving in large amounts at discrete timepoints. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes and construct an information discreteness measure to capture the intensity of firm-level information flows. In contrast to most firm characteristics that explain return contin- uation, information discreteness is not persistent. Consistent with our FIP hypothesis, we find that continuous information induces strong persistent return continuation that does not reverse in the long run. Over a six-month holding period, momentum decreases monotonically from 8.86% for stocks with continuous information during their formation period to 2.91% for stocks with discrete information but similar cumulative formation-period returns. Moreover, the abil- ity of continuous information to explain return continuation increases when investor attention constraints are more likely to bind and is not attributable to the disposition effect.

Number of Pages in PDF File: 57

Keywords: Momentum, Information Discreteness, Idiosyncratic Volatility

JEL Classification: G11, G12, G14

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Date posted: March 6, 2011 ; Last revised: October 2, 2012

Suggested Citation

Da, Zhi and Gurun, Umit G. and Warachka, Mitch, Frog in the Pan: Continuous Information and Momentum (September 30, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1777988 or http://dx.doi.org/10.2139/ssrn.1777988

Contact Information

Zhi Da
University of Notre Dame - Mendoza College of Business ( email )
Notre Dame, IN 46556-5646
United States
Umit G. Gurun (Contact Author)
University of Texas at Dallas
2601 North Floyd Road
Richardson, TX 75083
United States
Mitch Warachka
Claremont Colleges - Robert Day School of Economics and Finance ( email )
500 E. Ninth St.
Claremont, CA 91711-6420
United States
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