Glued to the TV: Distracted Noise Traders and Stock Market Liquidity
By Joel Peress, Daniel Schmidt. Journal of Finance, 2020
153 citations recorded by the source corpus.
In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/7fec0d75ac58973e861434b28e0639a5f40a258a
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Citations in the corpus
- Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality (2021, unknown): “On the other hand, Peress and Schmidt (2020) find evidence that reduced noise trading is associated with lower stock market liquidity using distracting US news stories to proxy for low attention from noise traders.”
- Attention allocation and return co-movement: Evidence from repeated natural experiments (2019, background): “7 Our paper is also related to Peress and Schmidt (2016) who use sensational news as exogenous shocks that attract retail investors’ attention from the stock market and find that trading activity, liquidity, and volatility drop among stocks owned mainly by retail investors.”