The research paper titled “Attention Spillover in Asset Pricing”, co-authored by An Li, Associate Professor, Wang Zhengwei, Associate Professor, and Yu Jianfeng, Professor at PBC School of Finance (PBCSF), Tsinghua University, and Chen Xin, Assistant Professor at Shenzhen University Webank Technology Institute of Fintech, was accepted by the Journal of Finance, recently.
The paper proposes an attention spillover effect from overconfidence bias and limited attention of an investor.
Limited attention and overconfidence are two widely studied factors in investor behaviors. Scholars worldwide have built theoretical models to demonstrate various market phenomena. Previous studies generally investigated the effect of a single behavioral factor at a time without considering the potential interactions among many, mainly due to the great identification challenges. It is difficult to identify the impact on price from overconfidence or limited attention even when they are considered separately. The variables that affect both are typically associated with the fundamental information of the company. Therefore, identifying potential interactions between overconfidence and limited attention is far more challenging.
In the empirical tests, the paper constructs a LOCAL variable to measure the performance of stocks with similar listing codes. The paper identifies the significant predictive power of the LOCAL variable on stock’s return and turnover.
The paper finds that when an investor makes a profit from current position, he actually has higher probability to trade stocks with listing codes similar as the stocks in the position. The paper also finds that as the distance of listing codes between stocks increases, both the return correlation and turnover correlation decreases in an almost monotonous way, which further confirms investors’ limited attention effect.
The effect states that an investor becomes overconfident and incentivized to trade after making a profit. Due to his limited attention, the investor is more likely to trade stocks noticed. Thus, the stock noticed by investors in winning status would be traded excessively and then get overvalued.
Again, the evidence provides speaks for the attention spillover effect in the stock market. The paper also proposes profitable strategy based on the effect. This profitable strategy suggests asset’s price can be driven by investors’ irrational trading from overconfidence bias and limited attention.
About the authors:
An Li, Associate Professor at PBC School of Finance, Tsinghua University, and Deputy Director of the Research Center for Capital Market and Corporate Finance. Her research fields include asset pricing, behavioral finance, and household finance. She has published many papers in international academic journals, such as the Journal of Finance, Review of Financial Studies, Journal of Monetary Economics, and Management Science. Her research results have been recognized by many awards set by academic circles, industry, and government at home and abroad, including the Chicago Quantitative Alliance Academic Competition Prize, the Crowell Memorial Prize by PanAgora Asset Management, and the 8th Outstanding Achievement Award for Scientific Research in Institutions of Higher Education (Humanities and Social Sciences) of the Ministry of Education of the People's Republic of China.
Wang Zhengwei, Deputy Secretary of the Party Committee, Associate Dean, Associate Professor, and Director of the Research Center for Intelligent Finance, PBC School of Finance, Tsinghua University. His research fields include FinTech and consumer finance, and his research results have been published in the Economic Research Journal, Management World, Journal of Financial Research, Journal of Management Science in China, China Industrial Economics, The Journal of World Economy, The Journal of Quantitative & Technical Economics, Journal of Finance, Review of Financial Studies, The Accounting Review, Management Science, and other publications. Wang is also the author of the academic monograph FinTech Research: Frontiers and Explorations.
Yu Jianfeng, Chair Professor at the PBC School of Finance, Tsinghua University, Associate Dean at the Institute for Fintech Research, Tsinghua University, and Director of the Research Center for Asset Management of the National Institute of Financial Research, Tsinghua University. He is mainly engaged in theoretical and empirical research on behavioral finance and macro-finance. His research results have been published in the American Economic Review, Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Monetary Economics, and Management Science, to name a few. His research has won many awards, including the Smith-Breeden First Prize.
Chen Xin, Assistant Professor at Shenzhen University Webank Technology Institute of Fintech. His main research fields are asset pricing, behavioral finance, and macro-finance. Chen was 2015 PhD student at the PBC School of Finance, Tsinghua University, supervised by Professor Yu Jianfeng and Professor An Li.
