Limited Attention and the Allocation of Effort in Securities Trading
Shane A. Corwin
University of Notre Dame - Mendoza College of Business
Jay F. Coughenour
University of Delaware - Department of Finance
January 17, 2008
While limited attention has been analyzed in a variety of economic and psychological settings, its impact on financial markets is not well understood. In this paper, we examine individual NYSE specialist portfolios and test whether liquidity provision is affected as specialists allocate their attention across stocks. Our results indicate that specialists allocate effort toward their most active stocks during periods of increased activity, resulting in less frequent price improvement and increased transaction costs for their remaining assigned stocks. Thus, the allocation of effort due to limited attention has a significant impact on liquidity provision in securities markets.
Number of Pages in PDF File: 50
Keywords: Limited Attention, Microstructure, Specialists, Transaction Costs
JEL Classification: D23, G14, J22working papers series
Date posted: June 5, 2005 ; Last revised: July 7, 2008
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