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Losing sight of the trees for the forest? Attention allocation and anomalies

Heiko Jacobs and Martin Weber

Quantitative Finance, 2016, vol. 16, issue 11, 1679-1693

Abstract: This paper tests asset pricing implications of the investor attention shift hypothesis proposed in theoretical work. We create a novel proxy for the dynamics of inattention towards firm-specific information and explore its impact on prominent return anomalies. As hypothesized and with all else equal, the proxy positively predicts the post-earnings announcement drift as well as the profitability of pairs trading, and negatively predicts the success of momentum strategies. Taken together, our findings highlight the importance of time-varying investor attention allocation for the price discovery process.

Date: 2016
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Handle: RePEc:taf:quantf:v:16:y:2016:i:11:p:1679-1693