Dynamic Attention Behavior under Return Predictability

Management Science, 2020

47 Pages Posted: 2 Jun 2020

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: February 19, 2020

Abstract

We investigate the dynamic problem of how much attention an investor should pay to news in order to learn about stock-return predictability and maximize expected lifetime utility. We show that the optimal amount of attention is U-shaped in the return predictor, increasing with both uncertainty and the magnitude of the predictive coefficient, and decreasing with stock-return volatility. The optimal risky asset position exhibits a negative hedging demand that is hump-shaped in the return predictor. Its magnitude is larger when uncertainty increases, but smaller when stock-return volatility increases. We test and find empirical support for these theoretical predictions.

Keywords: Optimal Attention, Portfolio Choice

JEL Classification: D53, G11, G12

Suggested Citation

Andrei, Daniel and Hasler, Michael, Dynamic Attention Behavior under Return Predictability (February 19, 2020). Management Science, 2020, Available at SSRN: https://ssrn.com/abstract=3590262

Daniel Andrei

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Desautels Faculty of Management ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Michael Hasler (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

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