Effects of Information Overload on Financial Markets: How Much Is Too Much?

44 Pages Posted: 23 Aug 2021 Last revised: 4 Apr 2022

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: April 1, 2022

Abstract

Motivated by cognitive theories verifying that investors have limited capacity to process information, we study the effects of information overload on stock market dynamics. We construct an information overload index by exploiting textual analysis tools on daily data from The New York Times since 1885. Our index is associated with lower trading volume and predicts higher market returns for up to 18 months, even after controlling for standard predictors and other news-based measures. Information overload also affects the cross-section of stock returns: Investors require higher risk premia to hold small, high beta, high volatile, and unprofitable stocks. Such findings are consistent with theories emphasizing that information overload increases information and estimation risk and deteriorates investors' decision accuracy amid their limited attention.

Keywords: Sentiment, dispersion, limited attention, predicting returns

JEL Classification: G40; G41; G12; G14

Suggested Citation

Bernales, Alejandro and Valenzuela, Marcela and Zer, Ilknur, Effects of Information Overload on Financial Markets: How Much Is Too Much? (April 1, 2022). Available at SSRN: https://ssrn.com/abstract=3904916 or http://dx.doi.org/10.2139/ssrn.3904916

Alejandro Bernales

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Marcela Valenzuela (Contact Author)

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
207
Abstract Views
672
Rank
223,057
PlumX Metrics