Investor Attention and Time-Varying Comovements

Abstract:     
This paper analyzes the effect of an increase in market-wide uncertainty on information flow and asset price comovements. We use the daily realized volatility of the 30-year treasury bond futures to assess macroeconomic shocks that affect market-wide uncertainty. We use the ratio of a stock's idiosyncratic realized volatility with respect to the S&P 500 futures relative to its total realized volatility to capture the asset price comovement with the market. We find that market volatility and the comovement of individual stocks with the market increase contemporaneously with the arrival of market-wide macroeconomic shocks, but decrease significantly in the following five trading days. This pattern supports the hypothesis that investors shift their (limited) attention to processing market-level information following an increase in market-wide uncertainty and then subsequently divert their attention back to asset-specific information.

Keywords: Investor Attention, information processing, comovements

Working Paper Series