Limited Attention and the Allocation of Effort in Securities Trading

50 Pages Posted: 5 Jun 2005 Last revised: 7 Jul 2008

See all articles by Shane A. Corwin

Shane A. Corwin

University of Notre Dame - Mendoza College of Business

Jay F. Coughenour

University of Delaware - Department of Finance

Date Written: January 17, 2008

Abstract

While limited attention has been analyzed in a variety of economic and psychological settings, its impact on financial markets is not well understood. In this paper, we examine individual NYSE specialist portfolios and test whether liquidity provision is affected as specialists allocate their attention across stocks. Our results indicate that specialists allocate effort toward their most active stocks during periods of increased activity, resulting in less frequent price improvement and increased transaction costs for their remaining assigned stocks. Thus, the allocation of effort due to limited attention has a significant impact on liquidity provision in securities markets.

Keywords: Limited Attention, Microstructure, Specialists, Transaction Costs

JEL Classification: D23, G14, J22

Suggested Citation

Corwin, Shane A. and Coughenour, Jay F., Limited Attention and the Allocation of Effort in Securities Trading (January 17, 2008). Available at SSRN: https://ssrn.com/abstract=736104 or http://dx.doi.org/10.2139/ssrn.736104

Shane A. Corwin (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

240 Mendoza College of Business
Notre Dame, IN 46556-0399
United States

Jay F. Coughenour

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States
(302) 831-1015 (Phone)

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