Glued to the TV: Distracted Noise Traders and Stock Market Liquidity |
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| Authors: | JOEL PERESS DANIEL SCHMIDT |
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| Institution: | 1. Joel Peress is at INSEAD. Daniel Schmidt is at HEC Paris. We are grateful to David Strömberg for sharing detailed news pressure data, including headline information, and to Terry Odean for providing the discount brokerage data. We thank Thierry Foucault;2. Marcin Kacperczyk;3. Yigitcan Karabulut, Maria Kasch, Asaf Manela, Øyvind Norli, Paolo Pasquariello;4. Joshua Pollet (the AFA discussant);5. Jacob Sagi;6. Paolo Sodini;7. Avi Wohl;8. Bart Yueshen;9. and Roy Zuckerman for their valuable comments, as well as seminar/conference participants at the AFA, EFA, 7th Erasmus Liquidity Conference, ESSFM Gerzensee, 2015 European Conference on Household Finance, UC Berkeley, Coller School of Management (Tel Aviv University), Marshall School of Business, Frankfurt School of Management and Finance, Hebrew University, IDC Arison School of Business, Imperial College Business School, University of Lugano, University of Paris-Dauphine, and Warwick Business School. Joel Peress would like to thank the AXA Research Fund and the Institut Europlace de Finance for their financial support. The authors have nothing to disclose with respect to The Journal of Finance's Submission Guidelines and Conflict of Interest Disclosure Policy. |
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| Abstract: | In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes. |
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