Finance Seminar（2018-16）

Topic: Endogenous Inattention and Price Underreaction to Information

Time: Monday, 9 July, 11:30-13:00

Location: Room 217, Guanghua Building 2

Abstract:

This paper demonstrates that rational inattention can explain the degree of asset price underreaction to information. We argue that investors have limited cognitive resources so they cannot respond immediately to all information, but they pay more attention to more value-relevant risks which are then reflected in prices more promptly in equilibrium. These predictions are empirically supported in a number of markets. For example, both volume and prices of higher credit risk corporate bonds respond to default risk news more promptly; volume and prices of lower credit risk bonds, for which discount rate variation is the dominant risk, respond to interest rate news more promptly. When bond credit quality changes, the response speeds also change accordingly. We find similar evidence in the equity and options markets. Because the reaction speed differs not just by asset, but also by the risk, our findings cannot be explained by trading frictions.

Introduction:

Jicui Li is a fifth year Ph.D. candidate in Finance at the Stanford Graduate School of Business. His current research focuses on understanding how investors allocate their scarce attention and how that impacts financial markets.

Your participation is warmly welcomed!