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Attention: How high-frequency trading improves price efficiency following earnings announcements

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  • Chakrabarty, Bidisha
  • Moulton, Pamela C.
  • Wang, Xu (Frank)

Abstract

Recent research indicates that high-frequency trading (HFT) helps incorporate fundamental information into prices, but how this happens is unclear. We examine reduced attention constraints as an important channel through which HFT enhances price efficiency. Using multiple proxies of attention constraints, we find that price inefficiencies are reduced by 65%–100% when high-frequency traders (HFTs) trade following low attention earnings announcements: initial price responses are larger and post-earnings-announcement drift is reduced. Results are not driven by firm size or announcement time-of-day. Our findings highlight how limited attention, a human bias affecting asset prices, is mitigated when machines trade.

Suggested Citation

  • Chakrabarty, Bidisha & Moulton, Pamela C. & Wang, Xu (Frank), 2022. "Attention: How high-frequency trading improves price efficiency following earnings announcements," Journal of Financial Markets, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finmar:v:57:y:2022:i:c:s138641812100063x
    DOI: 10.1016/j.finmar.2021.100690
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    References listed on IDEAS

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    Cited by:

    1. Brice Corgnet & Mark DeSantis & Christoph Siemroth, 2023. "Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach," Working Papers 2313, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Michael Goldstein & Amy Kwan & Richard Philip, 2023. "High-Frequency Trading Strategies," Management Science, INFORMS, vol. 69(8), pages 4413-4434, August.

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    More about this item

    Keywords

    High-frequency trading; Limited attention; Price efficiency; Earnings announcements;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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