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BH-5: Attention and Information
Does it Pay to Pay Attention?
1University of Melbourne; 2University of Maryland
We employ a novel brokerage account dataset to investigate the relation between individual investor attention and performance. In addition to portfolio holdings and trades, we observe when investors log-in to their trading account, what information they look at, and how much time they spend processing such information. We show that attention is positively related to investment performance - both at the portfolio return level as well as the individual trades level - and provide evidence that the superior performance of high-attention investors arises because they behave as momentum traders that purchase stocks early in the momentum cycle, several months before reversal sets in. We also show that paying attention is particularly profitable when trading stocks with high market capitalization, trading volume, volatility, number of analysts, dispersion of analyst forecasts, and news - indicating that it is for the stocks with high uncertainty, but for which a lot of public information is available, that it pays to pay attention. Finally, we find that account holders with higher invested wealth and higher exposure to small capitalization stocks, growth stocks, momentum stocks, and the overall market, are more attentive; that males pay more attention than females; and that attention is an increasing function of investors' age.
Attention on Volatility and Options
1University of Hong Kong; 2Oklahoma State University; 3Rutgers University
This paper contributes to the literature of investor attention by documenting a significantly positive and persistent relation between retail investor attention, measured by the Google search volume, and future realized stock return volatility. The relation implies a profitable option trading strategy of purchasing the high attention delta-neutral straddles and selling the low attention delta-neutral straddles, which earns a significant weekly return of 2.36% and is uncorrelated with the common risk factors as well as the firm level variance risk premium.
Detailed examination of option trading activities of different investor groups following increased Google search shows that retail option investors become more bullish and benefit most from the increasing stock volatility. The evidence strongly supports the theories of noise trader risk.
Cheap Products or Cheap Talk? Disclosed Markups and Ex-Post Performance of Structured Products
I study whether disclosure regulation can successfully unshroud hidden costs. I analyze reverse convertible securities, complex ﬁnancial products sold to retail investors that were aﬀected by the 2012 SEC requirement for value disclosure on the cover page of the prospectus. I ﬁnd that the more complex the product, the higher is its disclosed ex-ante valuation. This translates to lower markup, i.e. lower overvaluation relative to fair value. Lower markups, however, are not associated with higher net-of-cost returns because complex products subsequently underperform simpler products. While for simple products a one percent increase in annual markup is associated with an approximately one percent decrease in realized net returns, disclosed costs have no explanatory power for realized returns of complex products. My results suggest that disclosed markups of complex products, which are hard to verify, appear to be at best uninformative and at worst misleading about the actual costs. Compared to a randomly picked product, products in the lowest decile of disclosed costs generate 0.1% to 0.9% lower net returns.
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Conference: EFA 2017
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