A new study finds that where investors place their attention helps predict short-term stock returns. The research team included Zhi Da of the University of Notre Dame, with coauthors from Baruch College and National Taiwan University, and the paper appears in Management Science.
The authors measure retail attention using Google’s daily search volume index and institutional attention with Bloomberg’s “Daily Maximum Readership” score. For each stock they calculate abnormal attention and then average those values across stocks to create two daily market-level indexes, Aggregate Retail Attention (ARA) and Aggregate Institutional Attention (AIA). They test whether ARA and AIA predict future market returns using regressions.
The results show two clear patterns. Rising retail attention predicts lower returns over the next week, because individual investors often arrive late and push prices too high. By contrast, rising institutional attention predicts higher returns, especially before major news, as institutions often research stocks in advance.
Difficult words
- attention — what people or groups focus on
- predict — say what will happen in the future
- retail — sold or bought by individual consumers
- institutional — connected with large organizations or companies
- aggregate — made by combining several things into one
- abnormal — not normal or usual in a situation
- return — money gained or lost from an investmentreturns
- regression — a statistical test of relationships between variablesregressions
- readership — number of people who read something
Tip: hover, focus or tap highlighted words in the article to see quick definitions while you read or listen.
Discussion questions
- Do you ever check online search trends or news before making an investment? Why or why not?
- How might individual investors arriving late affect stock prices in your opinion?
- What are some advantages of institutions researching stocks in advance compared with individual investors?
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