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Asymmetric Attention and Stock Returns

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  • Thomas Wu

    (UC Santa Cruz)

  • Jordi Mondria

    (University of Toronto)

Abstract

We study the asset pricing implications of attention allocation theories. These theories allow us to predict the arrival of private information by observing investors' behavior. Specifically, attention allocation theories suggest that the arrival of private news to local investors lead to an increase in asymmetric attention to stocks between local and nonlocal investors. We construct a measure of asymmetric attention based on aggregate search volume in Google. We find that firms receiving an increase in asymmetric attention earn higher returns, even after controlling for size, book-to-market, momentum and liquidity factors. We find this effect to be stronger among illiquid stocks and stocks headquartered in remote locations. Our results provide direct support for attention allocation theories.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 134.

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Date of creation: 2011
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Handle: RePEc:red:sed011:134

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  1. Kewei Hou & David T. Robinson, 2006. "Industry Concentration and Average Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1927-1956, 08.
  2. James L. Davis & Eugene F. Fama & Kenneth R. French, . "Characteristics, Covariances, and Average Returns: 1929 to 1997," CRSP working papers 359, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  4. Laura Veldkamp & Stijn Van Nieuwerburgh, 2004. "Information Immobility and the Home Bias Puzzle," Working Papers 04-32, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Richard Portes & Hélène Rey, 2001. "The Determinants of Cross-Border Equity Flows," DELTA Working Papers 2001-08, DELTA (Ecole normale supérieure).
  6. Thomas Wu & Jordi Mondria, 2007. "The Puzzling Evolution of the Home Bias, Information Processing and Financial Openness," 2007 Meeting Papers 669, Society for Economic Dynamics.
  7. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  8. Jordi Mondria & Thomas Wu & Yi Zhang, 2008. "The Determinants of International Investment and Attention Allocation: Using Internet Search Query Data," Working Papers tecipa-326, University of Toronto, Department of Economics.
  9. Christopher J. Malloy, 2005. "The Geography of Equity Analysis," Journal of Finance, American Finance Association, vol. 60(2), pages 719-755, 04.
  10. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  11. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
  12. Michael H. Grote & Marc Umber, 2006. "Home biased? A spatial analysis of the domestic merging behavior of US firms," Working Paper Series: Finance and Accounting 161, Department of Finance, Goethe University Frankfurt am Main.
  13. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  14. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
  15. Lily Fang & Joel Peress, 2009. "Media Coverage and the Cross-section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(5), pages 2023-2052, October.
  16. Bae, Kee-Hong & Stulz, Rene M. & Tan, Hongping, 2006. "Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts," Working Paper Series 2005-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  17. Uysal, Vahap B. & Kedia, Simi & Panchapagesan, Venkatesh, 2008. "Geography and acquirer returns," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 256-275, April.
  18. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
  19. James Davis & Eugene F. Fama & Kenneth R. French, . "Characteristics, Covariances, and Average Returns: 1929-1997," CRSP working papers 471, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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Cited by:
  1. 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.
  2. ap Gwilym, Owain & Wang, Qingwei & Hasan, Iftekhar & Xie, Ru, 2013. "In search of concepts: The effects of speculative demand on returns and volume," Research Discussion Papers 10/2013, Bank of Finland.
  3. Jordi Mondria & Thomas Wu, 2012. "Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire, good news travels slow," 2012 Meeting Papers 50, Society for Economic Dynamics.

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