Endogenous Investor Inattention and Price Underreaction to Information

61 Pages Posted: 3 Oct 2017 Last revised: 4 Jan 2020

See all articles by Jiacui Li

Jiacui Li

David Eccles School of Business, University of Utah

Date Written: November 16, 2018

Abstract

I show that endogenous investor inattention – investors allocating cognitive resources based on incentives – can explain substantial price underreaction to public information in corporate bond and stock markets. The key evidence is that prices under- react less to more payoff-relevant risks. For instance, corporate bonds with worse credit quality react faster to default-relevant news, while those with longer duration react faster to Treasury yield changes. Investors appear to face binding attention constraints. My findings imply that models in which agents endogenously allocate attention may be useful in understanding investor inattention, a phenomenon often thought of as only reflecting investor mistakes.

Keywords: Investor inattention, Price underreaction, Information processing

JEL Classification: G12, G14, G41

Suggested Citation

Li, Jiacui, Endogenous Investor Inattention and Price Underreaction to Information (November 16, 2018). Available at SSRN: https://ssrn.com/abstract=3046870 or http://dx.doi.org/10.2139/ssrn.3046870

Jiacui Li (Contact Author)

David Eccles School of Business, University of Utah ( email )

8123 SFEBB, 1655 Campus Center Dr
Salt Lake City, UT 84112
United States

HOME PAGE: http://https://www.jiacui-li.com/

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