Investor Attention and Time-Varying Comovements

29 Pages Posted: 24 May 2007

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper analyses the effect of an increase in market-wide uncertainty on information flow and asset price comovements. We use the daily realised volatility of the 30-year treasury bond futures to assess macroeconomic shocks that affect market-wide uncertainty. We use the ratio of a stock's idiosyncratic realised volatility with respect to the S&P500 futures relative to its total realised volatility to capture the asset price comovement with the market. We find that market volatility and the comovement of individual stocks with the market increase contemporaneously with the arrival of market-wide macroeconomic shocks, but decrease significantly in the following five trading days. This pattern supports the hypothesis that investors shift their (limited) attention to processing market-level information following an increase in market-wide uncertainty and then subsequently divert their attention back to asset-specific information.

Suggested Citation

Peng, Lin and Xiong, Wei and Bollerslev, Tim, Investor Attention and Time-Varying Comovements. European Financial Management, Vol. 13, No. 3, pp. 394-422, June 2007. Available at SSRN: https://ssrn.com/abstract=988208 or http://dx.doi.org/10.1111/j.1468-036X.2007.00366.x

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

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Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
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National Bureau of Economic Research (NBER)

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Tim Bollerslev

Duke University - Finance ( email )

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United States
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Duke University - Department of Economics

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National Bureau of Economic Research (NBER)

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