Attention Allocation and Return Co-Movement: Evidence from Repeated Natural Experiments

75 Pages Posted: 20 Nov 2016 Last revised: 4 Nov 2017

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Yulin Huang

The University of Hong Kong - Faculty of Business and Economics

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: October 31, 2017

Abstract

We hypothesize that when investors’ attention to financial markets decreases, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.

Keywords: limited attention, attention allocation, return co-movement, earnings surprises

JEL Classification: G11, G12, G14

Suggested Citation

Huang, Shiyang and Huang, Yulin and Lin, Tse-Chun, Attention Allocation and Return Co-Movement: Evidence from Repeated Natural Experiments (October 31, 2017). Second Annual Volatility Institute at NYU Shanghai (VINS) 2016; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2872078 or http://dx.doi.org/10.2139/ssrn.2872078

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yulin Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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