Frog in the Pan: Continuous Information and Momentum
61 Pages Posted: 22 Dec 2013
Date Written: December 21, 2013
We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP hypothesis, we find that continuous information induces strong persistent return continuation that does not reverse in the long run. Momentum decreases monotonically from 5.94% for stocks with continuous information during their formation period to -2.07% for stocks with discrete information but similar cumulative formation-period returns. Higher media coverage coincides with discrete information and mitigates the stronger momentum following continuous information.
Keywords: Momentum, Information Discreteness, Idiosyncratic Volatility
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation