"Investor Inattention and the Market Impact of Summary Statistics"
©
Management Science,
2012
Volume: 58
|
Issue: 2
|
Pages: 336-350
Publication type: Journal article
Research Archive Topic: Capital Markets and Investments
Abstract
In this paper we identify a unique series of recurring stale information releases and show that the aggregate U.S. stock and Treasury markets respond to its release. The macroeconomic series — the U.S. Index of Leading Economic Indicators (LEI) — is released monthly and constructed as a summary statistic of previously released inputs. We show that a front-running strategy that trades S&P500 futures in the direction of the announcement a day before its release and then trades in the opposite direction of the announcement following its release generates an average annual return of close to 8%. These patterns are more pronounced for high beta stocks, for stocks that are more difficult to arbitrage, and during times when investors' sensitivity to firm-specific stale information is high. Other measures of information arrival, such as price volatility and volume, spike following the release. These empirical findings suggest that limited attention investors fail to recognize that the information in the LEI releases is stale and that they interpret it as new information, thereby causing temporary yet significant mispricing.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.