Investor Attention and Stock Returns

52 Pages Posted: 26 Jun 2018 Last revised: 24 Aug 2020

See all articles by Jian Chen

Jian Chen

Xiamen University - School of Economics

Guohao Tang

Hunan University - College of Finance and Statistics

Jiaquan Yao

Jinan University - Management School

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: July 23, 2020

Abstract

We find that investor attention proxies proposed in the literature collectively have a common component that has significant power in predicting stock market risk premium, both in-sample and out-of-sample. This common component is well extracted by using partial least squares, scaled principal component analysis, and principal component analysis approaches. Moreover, this component can deliver sizable economic gains for mean-variance investors in asset allocation. The predictive power of investor attention for the aggregate stock market primarily stems from the reversal of temporary price pressure and from the stronger forecasting ability for high-variance stocks.

Keywords: Investor Attention, Stock Return Predictability, Partial Least Square (PLS), Principal Component Analysis (PCA), Out-of-sample Forecast

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Chen, Jian and Tang, Guohao and Yao, Jiaquan and Zhou, Guofu, Investor Attention and Stock Returns (July 23, 2020). Available at SSRN: https://ssrn.com/abstract=3194387 or http://dx.doi.org/10.2139/ssrn.3194387

Jian Chen

Xiamen University - School of Economics ( email )

422 Siming Nan Road
Xiamen, Fujian 361005
China

Guohao Tang

Hunan University - College of Finance and Statistics ( email )

Lushan Road (S), Yuelu District
Changsha, Hunan 410006
China

Jiaquan Yao

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

HOME PAGE: http://www.jiaquanyao.com

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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