Da, Z., Hua, J., Hung, C., & Peng, L. (2020). Market Returns and a Tale of Two Types of Attention.

We show that daily aggregate retail attention to firms (ARA) strongly and negatively predicts future one-week market returns, especially in down markets and during times of high uncertainty; periods of high ARA are also associated with positive retail order imbalances. In contrast, daily aggregate institutional attention to firms (AIA) positively predicts future market returns around major prescheduled news announcements and when retail investors are inattentive. Our results remain robust for out-of-sample tests and when we instrument ARA with an exogenous shock. Additional cross-sectional tests show that ARA’s predictive power is stronger for portfolios of stocks experiencing greater capital losses, and AIA’s predictive power is stronger for high-beta portfolios. Our evidence suggest that institutional attention precedes the accrual of risk premium, while retail attention exacerbates the effect of behavioral biases and delays the diffusion of negative news. [Read More]