Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960636 | Journal of Financial Economics | 2006 | 40 Pages |
Abstract
Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors’ attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to category-learning behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability.
Related Topics
Social Sciences and Humanities
Business, Management and Accounting
Accounting
Authors
Lin Peng, Wei Xiong,