Attention: How High-Frequency Trading Improves Price Efficiency Following Earnings Announcements
58 Pages Posted: 25 Jul 2015 Last revised: 21 Sep 2021
Date Written: September 20, 2021
Recent research indicates that high-frequency trading (HFT) helps incorporate fundamental information into prices, but how this happens is unclear. We examine reduced attention constraints as an important channel through which HFT enhances price efficiency. Using multiple proxies of attention constraints, we find that price inefficiencies are reduced by 65% to 100% when high-frequency traders (HFTs) trade following low-attention earnings announcements: Initial price responses are larger and post-earnings-announcement drift is reduced. Results are not driven by firm size or announcement time-of-day. Our findings highlight how limited attention, a human bias affecting asset prices, is mitigated when machines trade.
Keywords: High-frequency trading, limited attention, price efficiency, earnings announcements
JEL Classification: G02, G10, G14, M40, M41
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