Investor Attention and Asset Pricing Anomalies
59 Pages Posted: 17 Aug 2019 Last revised: 1 Oct 2019
Date Written: September 30, 2019
We comprehensively examine the relationship between investor attention and widely studied financial market anomalies. We find that anomaly-based arbitrage strategies generate greater abnormal returns following days of high investor attention. This result is robust after controlling for risk factors and in a natural experiment setting in which the rounding of stock prices generates exogenous variations in investor attention. Further analysis of large-order imbalances shows that large traders trade more aggressively to take advantage of anomalies following high attention days. Consistent with the predictions of the Abreu and Brunnermeier (2002) model of arbitrage with synchronicity risk, the evidence suggests that anomalies are driven by mispricing and that arbitrageurs coordinate during periods of high attention.
Keywords: investor attention; anomaly; price limit; trade imbalance
JEL Classification: G12; G15; G40
Suggested Citation: Suggested Citation