When Does Attention Matter? The Effect of Investor Attention on Stock Market Volatility Around News Releases
62 Pages Posted: 9 Jan 2020 Last revised: 30 Apr 2020
Date Written: April 30, 2020
We empirically investigate how retail and institutional investor attention is related to the way stock markets process information. With a focus on 360 US stocks in the S&P 500 universe, our results show that higher investors’ attention around news releases is related to higher contemporaneous volatility. Further, retail investor attention increases the post-announcement volatility, whereas institutional investor attention has a small but negative impact on volatility on days following news releases on average over the cross-section of companies. These findings are in line with the hypotheses that attention of retail investors slows price-adjustments to new information and attention of institutional investors results in the opposite reaction. We show that these effects are heterogeneous in the type of news and the topic of the information being released. A portfolio allocation application highlights that these results are not only statistically significant but also sizeable in economic terms and can lead to an overperformance as large as dozens of basis points.
Keywords: limited attention, realized volatility, investor attention, retail investors, institutional investors, StockTwits, Twitter, news releases
JEL Classification: G14, G17, G40
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