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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.
First-Round Knock-out: Complexity, Disclosed Margins, and Ex-Post Returns of Structured Products
In 2012, SEC required issuers of structured retail products to disclose their estimated fair values so that the investor could understand the issuer’s built-in margin, i.e. the hidden costs of the product. I show that structured products became more complex following this regulatory change. Compared to the products issued by the same providers abroad, products issued in the U.S. added more often knock-out options (early terminations), complicating the comparison of effective annual costs of the products. I use a sample of 6,500 products issued between 2013 and 2015 to provide the first direct evidence of issuers’ margins. I find that according to the issuers’ estimates and taking into account knock-outs, the products cost investors on average 3.5% per year and their margins increase with complexity. Still, the disclosed margins of complex products are not large enough to fully explain their low ex-post returns. For example, the most complex third of the products earned on average -8% per year after an estimated average margin of 5.8%, translating into a gross, before-margin, return of -1.5% per year. These low gross returns seem hard to reconcile with the bull market conditions during the sample period. Instead, the results are consistent with issuers overestimating the fair values of the more complex products, made possible by their larger number of unobservable valuation inputs.
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Conference: EFA 2017
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