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Glued to the TV: Distracted Noise Traders and Stock Market Liquidity
Author(s) -
PERESS JOEL,
SCHMIDT DANIEL
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12863
Subject(s) - market liquidity , exploit , speculation , distraction , volatility (finance) , monetary economics , stock (firearms) , stock market , financial market , business , market microstructure , noise (video) , economics , financial economics , finance , order (exchange) , computer science , psychology , computer security , mechanical engineering , paleontology , horse , neuroscience , biology , engineering , artificial intelligence , image (mathematics)
ABSTRACT In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.