Investors’ Attention And Short-term Excess Returns On Stocks

The efficiency level of China’s A-Share Market is one of the focalpoints of Chinese academy. The rise of behavior finance has encouragedstudies of trading behavior in the view of behavior bias to explain theefficiency of China’s A-share market, on the basis of trading psychologyand trading behavior emerged from investors and the effect on theinvestment decisions of investors.Through the improvement of some of the basic assumptions, andadding theories of behavioral finance to the asset pricing model, financialeconomists established a variety of behavioral finance theory such as thebehavioral asset pricing model, trying to solve a large number oftheoretical and empirical phenomena founded in violation of theefficiency market hypothesis and the classical asset pricing theories. Theyall agree that investors’ attention may affect their behavior throughvarious ways in an era of information explosion, so the introduction ofattention allocation in the asset pricing process has extremely importantsignificance.In the previous studies, investors’ attention was measured in indirectways or approaches, such as the frequency of publishing analyst researchreports, market trading volume, news or reports of listed companies,stocks consistency expectations. With the convenient use anddevelopment of network technology, network information is increasinglyused by investors, and furthermore network statistics data are used as adirect measure of investors’ attention frequently. Thus these data such asGoogle trend or Baidu index are widely used as materials of research bythe investigators. The investors’ attention data in this article comes from theprofessional financial services and information providers——the websitewww.hexun.com. The data source is one of the characteristics andinnovative ways on this study. Using the real data and psychologicaltheories and combined with technical analysis, this paper tries todemonstrate the statistical characteristics of the appropriate short-termexcess returns from three aspects: overall stock market, industry sectorsand individual stocks. Based on these statistical characteristics, wepropose three trading strategy model corresponding to the three aspects,in order to obtain short-term excess returns.The results show that:1, In view of the overall stock market, there is positive correlationbetween the investors’ attention and the market trading volume. When theinvestors’ attention is rising, this has significant negative influence on theshort-term return of the stock index. Using the trend of Shanghai A-shareIndex as an extra variable, we found that the weak trend of ShanghaiA-share Index can enhance the possibilities of positive short-term returns.This paper proposed the market index trading strategy: buy the marketindex when the investors’ attention of the market decreased and themarket index trend is weak, sell it5trading days later. This strategy canobtain excess returns.2, For the industry sectors concerned, when the investors’ attentionincrease, we can determine the timing of the transaction according to theincrease proportion of the investors’ attention, thus can achieve thepurpose of obtaining excess returns.3, According to the individual stocks, in order to apply the tradingstrategy model, we should choose the small cap stocks with the largestincrease of investors’ attention and with strong moving trend. In this case,which is different from the market index, we can obtain excess returns.We also investigate the correlation of three short-term excessreturns-one trading day later, three trading days later and five tradingdays later-of the three aspects as the overall stock market, industry sectorsand individual stocks. The results shows that short-term excess return offive trading days later have positive correlation with that of three trading days later. This is more significant than the other two cases. It indicatesthat the short-term returns of these three aspects have a certain trend afterthree trading days, which perhaps involves some sense of momentumtrading strategies.Whether based on the stock market index, industry sectors orindividual stocks, we can use the Hexun’s investors’ attention data as thebasically and primary input in the correspondent trading strategy models.With different application forms or transformations of the investors’attention, according to the statistical properties of different transactionsubjects, we can obtain the short-term excess returns. Thus, we canconfirm that the three kinds of investor’ attention provided by Hexun.comhas practical application value and research significance. The threetrading strategy models proposed in this paper can improve theinvestment strategy and provide demonstration of effective investmentmethod, which has a certain reference value and practical significance.