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Investor Attention, Psychological Anchors, and Stock Return Predictability

46 Pages Posted: 19 Nov 2009 Last revised: 20 Mar 2012

Jun Li

University of Texas at Dallas

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: August 17, 2010

Abstract

Motivated by psychological evidence on limited investor attention and anchoring, we propose two proxies for the degree to which traders under- and over-react to news, namely, the nearness to the Dow 52-week high and the nearness to the Dow historical high, respectively. We find that nearness to the 52-week high positively predicts future aggregate-market returns, while nearness to the historical high negatively predicts future market returns. We further show that our proxies contain information about future market returns that is not captured by traditional macroeconomic variables and that our results are robust across G7 countries. Comprehensive Monte Carlo simulations and comparisons with the NYSE/AMEX market cap index confirm the significance of these findings.

Keywords: Under-reaction, Over-reaction, Anchor, Behavioral Finance

Suggested Citation

Li, Jun and Yu, Jianfeng, Investor Attention, Psychological Anchors, and Stock Return Predictability (August 17, 2010). Journal of Financial Economics (JFE), Vol. 104, pp. 401-419, May 2012. Available at SSRN: https://ssrn.com/abstract=1508852

Jun Li

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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