Predictable behavior, profits, and attention

Research output: Contribution to journalArticlepeer-review

204 Scopus citations


Stocks in the Shanghai market that hit upper price limits typically exhibit three characteristics: high returns, high volumes, and news coverage. We show that these price limit events attract investors' attention. Attention-grabbing events lead active individual investors to buy stocks they have not previously owned. Consistent with lowering investor search costs, events that affect a few (many) stocks lead to increased (decreased) buying. Upper price limit events coincide with initial price increases followed by statistically significant price mean reversion over the following week. Rational traders (statistical arbitrageurs) profit in response to attention-based buying. Smart traders accumulate shares on date t, sell shares on date t + 1, and earn a daily average profit of 1.16%. We show the amount they invest predicts the degree of attention-based buying by individual investors. We end by decomposing individual investor trades in order to estimate losses attributable to behavioral biases.

Original languageEnglish (US)
Pages (from-to)590-610
Number of pages21
JournalJournal of Empirical Finance
Issue number5
StatePublished - Dec 2007
Externally publishedYes


  • Attention
  • Behavioral finance
  • Statistical arbitrage

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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