Losing sight of the trees for the forest? Attention allocation and anomalies |
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Authors: | Heiko Jacobs Martin Weber |
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Institution: | Finance Area, University of Mannheim, L5, 2, 68131Mannheim, Germany. |
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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. |
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Keywords: | Behavioural finance Return predictability Limited attention Attention allocation Anomalies |
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