Investor Attention and Stock Returns

We propose an investor attention index based on proxies in the literature and find that it predicts the stock market risk premium significantly, both in sample and out of sample, whereas every proxy individually has little predictive power. The index is extracted using partial least squares, but the...

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Bibliographic Details
Published inJournal of financial and quantitative analysis Vol. 57; no. 2; pp. 455 - 484
Main Authors Chen, Jian, Tang, Guohao, Yao, Jiaquan, Zhou, Guofu
Format Journal Article
LanguageEnglish
Published New York, USA Cambridge University Press 01.03.2022
Subjects
Asset allocation
Attention
Investor behavior
Investors
Power
Principal components analysis
Risk premiums
Securities markets
Stocks
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Summary:We propose an investor attention index based on proxies in the literature and find that it predicts the stock market risk premium significantly, both in sample and out of sample, whereas every proxy individually has little predictive power. The index is extracted using partial least squares, but the results are similar by the scaled principal component analysis. Moreover, the index can deliver sizable economic gains for mean-variance investors in asset allocation. The predictive power of the investor attention index stems primarily from the reversal of temporary price pressure and from the stronger forecasting ability for high-variance stocks.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109021000090