Volume And Price,Attention Allocation And Salience Effect

Compared to developed stock markets,the Chinese stock market is characterized by more active retail trading,and higher turnover rate.Retail investors contribute 85% of daily trading volume on the Shanghai Stock Exchange,as stated by the exchange’s annual report.Retail investors are less rational and less professional than institutional investors,and their transactions are more likely to be driven by attention.Given the dominance of retail trading,it is crucial to understand the characteristics of attention-grabbing transactions and the precise psychology of this stylized phenomenon.The salience theory explains the psychological mechanism by which investors’ attention is distorted by salient information,leading to biased investment decisions.This theory centers on two fundamental inquiries: First,how does salience impact decision-makers’ expectations and trading behavior? Second,what makes a payoff salient?The rapidly expanding research on salience has thoroughly addressed the first inquiry and demonstrated that decision-makers are involuntarily drawn to salient stimuli,leading to distorted economic choices.Consequently,the second inquiry assumes particular significance: What makes a payoff salient? Or,what are the psychological mechanisms that capture investors’ attention? This dissertation contributes to the second inquiry from three innovative perspectives.Firstly,this dissertation contributes to the salience theory by testing its underlying psychological mechanisms.The literature identifies three psychological mechanisms that capture investors’ attention: i)the contrast mechanism,which captures salient comparisons with surroundings in cross-sections;(ii)the surprise mechanism,which captures salient comparisons with recalled experiences in time series;and(iii)the prominence mechanism,which reflects salient factors exogenous to the stimulus itself.Previous studies have provided empirical evidence of the salience effect based on the contrast mechanism.However,there are no direct implications of the salience effect from the surprise and prominence mechanisms for empirical asset pricing.This dissertation explores the allocation of investors’ attention through the contrast mechanism and surprise mechanism,which are guided by the principles of context dependence and reference dependence.Additionally,it examines the exogenous attraction of investors’ attention to the price limit in the Chinese stock market.Finally,this dissertation proposes a composite salience function that incorporates price information from reference dependence and extreme return information from the price limit.This function reveals how the mechanisms of surprise and prominence contribute to and intensify the salience effect.Secondly,this dissertation further expands on the salience theory by incorporating the perspective of trading volume.The salience function mentioned above delineates the salience effect in terms of price,based on the principles of context dependence and reference dependence.However,it is worth mentioning that trading volume plays an important role in capturing the attention of investors.This dissertation discusses the different paths of price and volume in the allocation of investors’ attention,as well as their implications for financial markets.This dissertation introduces a new salience function that reflects how salient trading volume influences investors’ attention.The function describes the psychological process by which salient trading volume distorts attention allocation and further affects the equilibrium stock price.The analysis presented in this dissertation demonstrates that volume can provide distinct information that reflects investors’ attention,which is different from the information provided by returns.Thirdly,this dissertation contributes to the salience theory from the perspective of the trading characteristics in the Chinese stock market.There are significant differences in investor structure,trading systems,and trading characteristics between the Chinese and U.S.stock markets.These differences also impact the allocation of investors’ limited attention.In comparison to the U.S.stock market,the Chinese stock market has higher turnover rates,more active retail trading,and larger arbitrage limits.This dissertation proposes a composite salience theory measure that integrates salient return,volume,and special price limit mechanism in China.The measure is constructed to describe the characteristics of salient stock returns in China from multidimensional perspectives.This dissertation contributes to the existing research on limited attention and the salience theory.The findings are beneficial for regulators in designing market stability mechanisms that rely on abnormal return and trading volume.This dissertation is organized as follows.Chapter 1 is the introduction.Chapter 2 is a literature review.It reviews the relevant literature from three aspects: the hypodissertation of salience theory(which explores the influence of volume and price on asset prices),the premise of salience theory(which considers investors’ limited attention and attention allocation),and the relevant research of salience theory.The review aims to provide a comprehensive understanding of the salience theory and its implications for asset pricing.Chapters 3 through 5 delve into different aspects of the salience theory.Chapter 3 investigates the variations in investors’ attention allocation mechanisms,particularly in relation to psychological mechanisms including contrast,surprise,and prominence.Chapter 4 analyzes the differences in volume and price,while Chapter 5 concentrates on the distinctions in market characteristics between the Chinese and U.S.stock markets.The objective of this dissertation is to broaden the salience theory by examining reference dependence,salient volume and price,and the price limit,among other factors.Finally,Chapter 6 provides a conclusion to this dissertation.This dissertation contributes to the existing literature in three ways.Firstly,different from prior salience theory measures that rely on return contrast in the crosssection,this dissertation introduces a novel salience theory measure based on the psychological mechanisms of surprise and prominence.This measure captures salience induced by price contrast in time series and exogenous occasions.Secondly,different from salience theory measures that focus on price,this dissertation introduces a novel salience theory measure from the perspective of volume.This measure considers the difference in attention allocation mechanism between price and volume.Thirdly,different from salience theory measures constructed in the U.S.stock market,this dissertation proposes a composite salience theory measure that integrates salient return,volume,and special price limit mechanism.This measure is based on the trading characteristics of the Chinese stock market.