Attention And Stock Price Behavior

The core task of financial study is intertemporaly optimal allocation of economic resources.Rational choice making is one of the most important features of agents in financial economy fromthe point of view of traditional finance. Based on investors' optimal decision-making and theunbiased estimate for the future, we can get insight into the modern finance, such as that theshort-term changes in stock price reflecting the volatility of the information and long-term changesin response to the compensation for risk. Furthermore, we can use portfolio theory to obtain theexpected benefits and CAPM or option pricing theory can be used for pricing capital assets.However, there are more and more anomalies against the efficient market hypothesis which hasbeen challenged for its failure predicting the relationship between information and price behavior.The rise of behavioral finance makes a beginning to doubt the rationality of investor behavior infinancial market. Behavioral bias such as representativeness bias, overconfidence havs been used toexplain the market price behavior. Attention is not a behavioral bias, but as an important part of thecognitive processes, it has become an important tool to understand the behavior of financialmarkets recently. It has been used to study microstructure of finance, stock price forecasts, financialreporting disclosure and other areas in financial market.In modern cognitive psychology, attention means mental energy to focus on the sensory orpsychological events. Many areas have been studied for attention from the processing capacity,selective attention, arousal level, attention control, awareness and attention to the cognitiveneuroscience,etc. In finance, attention means agents to make decisions based on partial information.When the limited attention constraints the investor, their investment decisions depends only onpartial information. The ignoring information has subsequently become more important whenestimating the stock price and risk. In this paper, attention and attention theory is the main linerunning through the full chapter in analyzing stock price behavior and information regulation inChina stock market. Information connects the cognitive processing and attention. And otherbehavioral bias often interacts with attention to affect stock price behavior.The whole analysis of this paper is composed of two parts which are attention and cognitivebias impacting price behavior and attention itself impacting price behavior. If attention reallyinfluences the scope and efficiency of investors' information processing, then there is need for considering the impact of psychological factors in the regulation of capital market informationdisclosure based on the irrational investors.Limited attention and momentum effect is the first issue in this paper which solves the twoproblems of identifying validity of the momentum trading strategy in China stock market and theexplanation for the momentum effect from attention theory. Due to the differences in samplingmethods and data frequency for the effectiveness of the momentum trading strategy in China stockmarket, previous studies did not reach a consensus on the identification of the momentum effect. Inthis paper, week data is used to found whether momentum trading strategy is effective. Secondly, amomentum portfolio is formed based on the different groups of attention. The limited attentionreflects investor's limited information processing capability. The Interaction of the limited attentionand other behavior bias will produce different patterns of behavior. For example, when investorattention and extrapolation or overconfidence interact, a momentum effect can be generatedbecause investors often extrapolate the stock price according to the trend in the past.Self-attribution makes investors enlarge their confidence interval when they confirm their privateinformation in the release of public information and keep the same level when the publicinformation denied their private information This asymmetric reaction means that, after theformation of the initial price, stock price will be accompanied by the same trend which willcontinues to form the momentum effect on average. If the investors are not aware of one stock, theywill not extrapolate the price, nor will they overreact to private information. But when investor'sattention has been paid to some certain stock, the interaction of overconfidence and other behaviorbias will form the Momentum effect. This paper chooses the China A-share listed companies from2003to2009as the sample to identify the China stock market momentum effect, examiningwhether investors-attention which is a part of the cognitive processes has explanatory power to themomentum effect.We select the period which momentum effect is more obvious, that is theformation period of one week, holding period of one week and two weeks of the case as a testinterval. And the study found that when the formation period and holding period are both one week,the attention has a certain explanatory power on momentum effect.Securities laws of China has required the information disclosure of listed companies, but dueto the means of supervision and other factors there still exist opportunities in the use of insiderinformation. And significant information about companies leaked in advance, which leads to thestock price fluctuating abnormally before the release of relevant information. In every period stockprice is decided by sophisticated investors and noise traders together. In the short term before andafter the release of information, the noise traders are price followers while sophisticated investors trade according to expected or leaked news, which causes price fluctuations, the greater the pricefluctuation the stronger its significant (the higher degree of attention) and also makes the noisetraders follow. The pursuit of high degree attention stock in the overall market led to thephenomenon that though the stock receives more attention when information releases, its marketreaction is low. After information releasing, the noise traders are no longer act as price followers,but lead the forming of the market price. The false belief on private information led to the deviationof stock prices to the basic value, with the psychology of overconfidence, the more attention paid tothe stock share, the higher degree of deviation.As the capacity of the investors' attention is limited, attention is allowcated to different signalsor tasks when dealing with multi-information or multiple tasks. When a kind of information or atask gets more attention resources, the allocation for other information or task will become less.Therefore, the more the attention of investor resources are scattered, the worse the understanding ofthe earning information. When this comes to stock prices, it expresses that the market pays weakresponse to earning information. China's capital market A share companies are choosed to study themarket reaction when different number of companies publicing finiancial report in a day. Investorcan not efficiently study the content of earnings information in short window. In the long windowafter earning information is released, the market reaction is often reversal, this kind of phenomenonis the result of both investors not fully understanding earning information content and noise tradersworking.Selective attention makes people can only process single information in one point of time andthe allowcation of attention make people distribute attention capacity in different information ortasks. When there is mass of information relating the fundamental of companies in the market,investors need to select for further analysis. In addition to the regularly issued financial report bythe company, analyst reports provide an optional source of information for investors. In Chinastock market, retail investors are in the majority for quite a long time, and the type of stockholdings is fewer, so on one hand investors will search the information the shares they held orknows. And on the other hand, the recommended rating information given by analysts whenchoosing shares also becomes an important decision basis. Therefore, we expect that the higher thelevel of investor attention is given to one stock, the greater the market react after the release of theinformation recommended by financial analysts.Attention is not a behavior bias, but it is an important part of the cognitive process. From thepoint of view of information, its essence is agents choosing partial information and making ajudgment, this behaviour pattern often leads to the investors to suboptimal decision, what's more,this also causes the companies'opportunism behavior using the limited attention of investors,such as issuing equity when stock prices overvalued, making earnings management before issuingnew shares, etc. The regular theory of concept system is the combination of Public interest theoryand Capture theory. In this theory, the main target for regulating information in capital market is tosovle market failure; this is mainly embodied in the ease of agency problems caused by externalityand information asymmetries. The main factors concerned are financial externalities, actualexternalities, agency cost, etc. If limited rational factors are considered, to Nudge investor'sdecision, it is necessary to consider investors' cognitive behavior in the process of establishing andperfecting information disclosure regulation system. The last part of the paper use informationdisclosure model to discuss the problems related.