#08-20
Attenion and Trading
Yu Yuan, April 2008
Abstract: This study empirically explores the effects of attention levels on investors'
trading behavior and on market price dynamics. Specifically, we analyze the
ability of market-wide attention-grabbing events - record-breaking events of
the Dow index and front page articles about the stock market - to predict the
trading behavior of investors and market returns. The empirical results show
that the impact of attention is pervasive across the market. High attention
causes individual investors to reduce their stock holdings dramatically when
the market level is high and to increase their stock holdings modestly when
the market level is low. The aggressive selling by individual investors induces
institutional investors to trade and has a negative impact on market prices,
reducing market returns by 19 basis points on days following attention-grabbing
events.
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