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Investor Inattention and the Market Impact of Summary Statistics

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Author Info

  • Thomas Gilbert

    ()
    (Foster School of Business, University of Washington, Seattle, Washington 98195)

  • Shimon Kogan

    ()
    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Lars Lochstoer

    ()
    (Graduate School of Business, Columbia University, New York, New York 10027)

  • Ataman Ozyildirim

    ()
    (The Conference Board, New York, New York 10022)

Abstract

We show that U.S. stock and Treasury futures prices respond sharply to recurring stale information releases. In particular, we identify a unique macroeconomic series--the U.S. Leading Economic Index ® (LEI)--which is released monthly and constructed as a summary statistic of previously released inputs. We show that a front-running strategy that trades S&P 500 futures in the direction of the announcement a day before its release and then trades in the opposite direction of the announcement following its release generates an average annual return of close to 8%. These patterns are more pronounced for high beta stocks, for stocks that are more difficult to arbitrage, and during times when investors' sensitivity to firm-specific stale information is high. Treasury futures exhibit similar, albeit less pronounced, price patterns. Other measures of information arrival, such as price volatility and volume, spike following the release. These empirical findings suggest that some investors are inattentive to the stale nature of the information included in the LEI releases, instead interpreting it as new information, and thereby causing temporary yet significant mispricing. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 58 (2012)
Issue (Month): 2 (February)
Pages: 336-350

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Handle: RePEc:inm:ormnsc:v:58:y:2012:i:2:p:336-350

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Keywords: capital markets; stale macroeconomic information; investor inattention;

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Cited by:
  1. Thoenes, Stefan & Gores, Timo, 2012. "Attention, Media and Fuel Efficiency," EWI Working Papers 2012-11, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  2. Stefano Giglio & Kelly Shue, 2013. "No News is News: Do Markets Underreact to Nothing?," NBER Working Papers 18914, National Bureau of Economic Research, Inc.
  3. Palomino, F.A. & Renneboog, L.D.R. & Zhang, C., 2008. "Information Salience, Investor Sentiment, and Stock Returns: The Case of British Soccer Betting," Discussion Paper 2008-044, Tilburg University, Tilburg Law and Economic Center.
  4. Sadique, Shibley & In, Francis & Veeraraghavan, Madhu & Wachtel, Paul, 2013. "Soft information and economic activity: Evidence from the Beige Book," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 81-92.
  5. Schmöller, Arno, 2010. "Bidding Behavior, Seller Strategies, and the Utilization of Information in Auctions for Complex Goods," Munich Dissertations in Economics 11175, University of Munich, Department of Economics.
  6. Sofía B. Ramos & Helena Veiga & Pedro Latoeiro, 2013. "Predictability of stock market activity using Google search queries," Statistics and Econometrics Working Papers ws130605, Universidad Carlos III, Departamento de Estadística y Econometría.
  7. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.

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