Is Attention an End Game?

The internet has helped investors to access information about stocks more easily. We have repeatedly looked into internet searches as a proxy for attention – and on how they affect liquidity and volatility. Today, we look at the type of attention in more detail. Is attention an end game? Or do firm-specific and market-related attention differ in the way they affect stock markets?

Different types of attention

Aouadi, Arouri, and Teulon address this question in their 2013 Economic Modelling paper “Investor attention and stock market activity: Evidence from France”. In particular, they explore the following hypothesis for the French market (using the CAC40 index stocks):

• Firm-specific attention increases efficiency, as more and more people look for the stock in the internet.
• Market-related attention signifies more uncertainty, as it usually follows some unforeseen or unprecedented market event.

To measure attention, the authors use Google Search Volume (GSV) for firm names (firm-specific attention) and the term “CAC 40” (market-related attention). The liquidity proxy is the Amihud ratio (the absolute return of stock divided by traded volume in Euros) in a given period.

Liquidity and attention types

To measure the relation between the different attention types, the authors regress the illiquidity on stock-specific attention, market-wide attention, the interaction between market value of the stock and firm attention, and various control variables variables. Table 1 displays the regression results for selected stocks.

^{Information taken from Table 5, Aouadi et al. (2013). All coefficient estimates are significant at the 5% level, at least.}

Firm-specific has a predominantly negative impact on illiquidity (meaning that it increases liquidity), while market attention has a predominantly positive impact (meaning that it decreases liquidity). The intuition is as follows: when they search for information about a specific stock on the internet, this increases the overall informedness of investors. Hence, information asymmetry decreases, and investors trade more in the stock. This drives up liquidity. On the other hand, market attention measures higher overall uncertainty. Hence liquidity decresaes with high market-wide attention. For most of the stocks the interaction term is opposite the sign of the firm attention, suggesting that attention matters less for larger firms.

What about volatility?

Aouadi and coauthors run a similar regression to test the relationship between volatility and different attention types. While the results for firm attention are mixed, higher market attention significantly increases volatility for all the stocks. So what is going on here?

• For firm attention, there are two factors pulling in opposite directions. More attention means more information incorporation into prices and thus higher volatility. However, more attention also decreases uncertainty, thus resulting in lower volatility.
• Market attention is a more powerful factor than firm attention – and since attention is a limited ressource, it market attention comes at the price of firm attention. Hence, stock prices contain less information when market attention is high. In summary, market attention increases uncertainty and results in higher volatility.

Take-away: Different attention types have different impact

In summary: Firm and market attention affect liquidity and volatility differently. As people search more about a stock, uncertainty about a stock decreases. Market attention, on the other hand, increases stock-specific uncertainty. This decreases liquidity and increases volatility.

Author: Monika Gehde-Trapp