Investor attention and market microstructure

- This paper is the first to study the impact of investor attention on the market microstructure in the Kyle's (1985) setup.
- It supports that higher investor attention leads to higher stock market volatility.
- With an increase of attention, the retail investor trades more aggressively.
- Higher retail investor attention leads to higher market liquidity and stock market volatility.
- Our model can explain how attention affects buying and selling.

This paper develops the first economic model to study the impact of investor attention on the market microstructure in the Kyle's (1985) setup. Our model strongly supports the empirical observation that higher investor attention leads to higher stock market volatility. The first special case with one fully and one limited attentive traders explains that higher attention leads to higher trading intensity of retail investors, market liquidity and stock market volatility. The second special case with one fully inattentive and one limited attentive traders explains how investor attention affects buying and selling.