Investor Attention Strategy

Abstract

This paper documents the motivation, the construction, and the profitability of an investment strategy based on investor attention in the options market. Using the option volume after a one-week dormant period as a proxy for investor attention, we show that heightened investor attention after the dormant period has rich investment implications. A portfolio constructed on the basis of volume spike events immediately after the dormant period generates an abnormal return of 68 basis points on a monthly basis (8.16% on an annualized basis). This abnormal return is robust to risk adjustment using standard asset pricing models. Our findings constitute strong evidence that it is profitable for outside investors to mimic attentive investors in the options market and reap economically and statistically significant profits.

Keywords: Investor Attention, Volume Spikes, Attention Portfolios, Abnormal Returns

JEL Classification: G1