Investor Attention and Asset Pricing Anomalies

Abstract

We examine the relation between investor attention and financial market anomalies. We find that anomaly returns are higher following high-attention days. The result is robust after controlling for risk factors, the effect of news, and in a natural experiment setting in which the rounding of stock prices generates exogenous attention variation. An analysis of order imbalances shows that large traders trade on anomaly signals more aggressively upon observing high attention. The evidence suggests that arbitrageurs may use high attention as a coordination device to trade and profit from mispricing, supporting the theory of arbitrage with synchronization risk of Abreu and Brunnermeier (2002).