Losing Sight of the Trees for the Forest? Attention Allocation and Anomalies
Quantitative Finance, Forthcoming
36 Pages Posted: 18 Mar 2012 Last revised: 20 Jun 2016
Date Written: March 18, 2016
This paper tests asset pricing implications of the investor attention shift hypothesis proposed in theoretical work.We create a novel proxy for the dynamics of inattention towards firm-specific information and explore its impact on prominent return anomalies. As hypothesized and with all else equal, the proxy positively predicts the post-earnings-announcement drift as well as the profitability of pairs trading, and negatively predicts the success of momentum strategies. Taken together, our findings highlight the importance of time-varying investor attention allocation for the price discovery process.
Keywords: Behavioral finance, return predictability, limited attention, attention allocation, anomalies
JEL Classification: G12, G14
Suggested Citation: Suggested Citation