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.
Original language | English (US) |
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Pages (from-to) | 563-602 |
Number of pages | 40 |
Journal | Journal of Financial Economics |
Volume | 80 |
Issue number | 3 |
DOIs | |
State | Published - Jun 2006 |
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management
Keywords
- Behavioral biases
- Category effects
- Comovement
- Limited attention
- Return predictability