Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns

35 Pages Posted: 6 Mar 2019

See all articles by Tomas Reyes

Tomas Reyes

Pontifical Catholic University of Chile

Date Written: March 2019

Abstract

We argue that negative stock market performance attracts more attention from retail investors than comparable positive performance. Specifically, we test and confirm the hypothesis that retail investors pay more attention to negative extreme returns than positive ones. We present a measure of attention at the aggregate and company‐specific levels using Google's internet search volume indexes. These measures correlate with, but are different from, existing proxies of attention. Our empirical results strongly support the position that investors display a negativity bias in attention allocation with respect to extreme stock returns. Across all specifications, lagged negative extreme returns are stronger predictors of high attention at the individual‐stock and stock market levels than positive ones.

Suggested Citation

Reyes, Tomas, Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns (March 2019). International Review of Finance, Vol. 19, Issue 1, pp. 155-189, 2019, Available at SSRN: https://ssrn.com/abstract=3345664 or http://dx.doi.org/10.1111/irfi.12180

Tomas Reyes (Contact Author)

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, RM 7820436
Chile

HOME PAGE: http://www.uc.cl

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