The Demand for Information

Abstract

I use a new measure of investor attention and measure its affect on the returns of winner and loser portfolios over a holding period of up to 52 weeks. Whilst I do not find any relationship between Stock Information Demand and price momentum, I do find that increases in investor attention affect the demand for stocks, which for ‘winner stocks’ in turn pushes prices up. I find evidence of this effect in a small sample of large, highly traded, and closely followed firms, i.e. the S&P500.My measure of attention is derived from the Google Insights for Search webpage, which allows access to the relative volumes of search criteria submitted to Google each week, since 2004. This measure of attention, which I call the Stock Information Demand (SID) is a more direct measure of market participants’ behaviour than previous studies have used.I evaluate the returns to the S&P500 constituents over five years, and find that stocks with high degrees of Stock Information Demand(SID) that have increased in price over the previous 4 weeks tend to continue to increase in price for a further 4 weeks. Stocks with low levels of SID do not show the same continued price appreciation. Further to this, I also find less robust evidence that stocks which have declined in price over the previous 4 weeks, and have not been subject to high levels of SID show a continued longer term price decline, out to 52 weeks in some cases.I am not able to measure any significant degrees of price reversal, and hence over reaction, or of robust under reaction, so am not able to add further evidence to the two behaviour models provided by K. Daniel, Hirshleifer, & Subrahmanyam (1998) or Barberis, Shleifer, & Vishny (1998). My results support the previous findings of Hong, Lim, & Stein (2000) and of Chan (2003), in that stocks react quickly to good news, and slowly to bad news. My results also support previous studies of attention, such as Barber & Odean (2008), and the related work Barber, Odean, & Zhu (2006), showing that stocks subject to investor’s attention do change in price, and that noise traders are capable of moving market prices.