Identifying the Effects of Macroeconomic Attention Through Foreign Investor Distraction

Paul Marmora

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 8, 3644-3671

Abstract: While the causal impact of limited attention to macroeconomic news is difficult to detect, this article proposes one solution: exploiting when foreign investors are “distracted” by risk factors in their home markets. I demonstrate that financial activity in the average foreign investor’s home market decreases foreign attention paid to 21 emerging economies, measured using Google search volume for economy-specific financial terms that emanate from outside each economy’s border. Exploiting this effect using an instrumental variables approach, I find that an exogenous increase in foreign attention preceding a scheduled monetary policy rate announcement raises preannouncement stock returns and announcement day turnover.

Date: 2023
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