TY - JOUR
T1 - Predictable behavior, profits, and attention
AU - Seasholes, Mark S.
AU - Wu, Guojun
N1 - Funding Information:
We thank the editor and two anonymous referees, as well as Terry Hendershott, Gur Huberman, David Hirshleifer, Dirk Jenter (our AFA discussant), Terry Odean, Gideon Saar, Tyler Shumway, Paul Tetlock, and Ning Zhu for helpful comments. We also thank the seminar participants at the 2006 American Finance Association Meetings in Boston, Goldman Sachs Asset Management, the Shanghai Stock Exchange, the 2004 Behavioral Finance Conference at Notre Dame University, Hong Kong University of Science and Technology, University of Illinois, University of California Berkeley, University of Houston, and University of Michigan for their input. Jun Cui and Fred P. Wessells provided excellent research assistance. Wu gratefully acknowledges financial support from the Center for International Business Education. This paper is made possible with help from the Shanghai Stock Exchange.
Copyright:
Copyright 2007 Elsevier B.V., All rights reserved.
PY - 2007/12
Y1 - 2007/12
N2 - Stocks in the Shanghai market that hit upper price limits typically exhibit three characteristics: high returns, high volumes, and news coverage. We show that these price limit events attract investors' attention. Attention-grabbing events lead active individual investors to buy stocks they have not previously owned. Consistent with lowering investor search costs, events that affect a few (many) stocks lead to increased (decreased) buying. Upper price limit events coincide with initial price increases followed by statistically significant price mean reversion over the following week. Rational traders (statistical arbitrageurs) profit in response to attention-based buying. Smart traders accumulate shares on date t, sell shares on date t + 1, and earn a daily average profit of 1.16%. We show the amount they invest predicts the degree of attention-based buying by individual investors. We end by decomposing individual investor trades in order to estimate losses attributable to behavioral biases.
AB - Stocks in the Shanghai market that hit upper price limits typically exhibit three characteristics: high returns, high volumes, and news coverage. We show that these price limit events attract investors' attention. Attention-grabbing events lead active individual investors to buy stocks they have not previously owned. Consistent with lowering investor search costs, events that affect a few (many) stocks lead to increased (decreased) buying. Upper price limit events coincide with initial price increases followed by statistically significant price mean reversion over the following week. Rational traders (statistical arbitrageurs) profit in response to attention-based buying. Smart traders accumulate shares on date t, sell shares on date t + 1, and earn a daily average profit of 1.16%. We show the amount they invest predicts the degree of attention-based buying by individual investors. We end by decomposing individual investor trades in order to estimate losses attributable to behavioral biases.
KW - Attention
KW - Behavioral finance
KW - Statistical arbitrage
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U2 - 10.1016/j.jempfin.2007.03.002
DO - 10.1016/j.jempfin.2007.03.002
M3 - Article
AN - SCOPUS:35548999163
SN - 0927-5398
VL - 14
SP - 590
EP - 610
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
IS - 5
ER -