Dynamic Attention Behavior under Return Predictability
Management Science, 2020
47 Pages Posted: 2 Jun 2020
Date Written: February 19, 2020
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: Suggested Citation