The Empiricalanalysis Of The Effects Of The Macroeconomic Shocks On Market Volatility And Comovement

Enlightened by the psychological evidence that attention is a scarce cognitive resource,this paper analyses the effects of investor’s attention allocation on asset-price dynamics.Especially when the investor’s attention is limited, the effect of information flows onasset-price with the limit attentions. Maximizing the investor’s utility function which isstrict to the limited attention, the solution of investor’s attention allocation is to minimumthe volatility of the next period dividends. Minimizing the uncertainty of the future makesthe investor’s consumption decision more efficient. When the uncertainty of the marketfactor is bigger than the sector-and firm-specific factors, the investor will allocate moreattention on the market factor.At the empirical analysis, the Shanghai Stock Exchange government bond index isused to access macroeconomic shocks which increase the market-wide uncertainty. Thevariance of SSE Composite Index stands for the market volatility. And the ratio of stock’sidiosyncratic variance divided by the total variance of stocks mimics the firm comovementwith market. After the empirical analyses of the impacts of macroeconomic shocks on themarket volatility and the comovement, the graphs of impulse responses shows that when theshocks arrive, the volatility of the market and the comovement of asset with the market willincrease at first, then they will decrease,at last they will reverse in the following days. Sothe attention shifts with the changings of the information flows into the market. This patternis consistent with the hypothesis that investors shift their limited attention to processingmarket-level information following an increase in market-wide uncertainty and thensubsequently divert their attention back to asset-specific information.