Beruflich Dokumente
Kultur Dokumente
DOI: 10.1111/irfi.12180
ABSTRACT
I. INTRODUCTION
Psychology research supports the notion that bad is stronger than good. Bau-
meister et al. (2001) argue that in most situations, negative events will produce
larger, more consistent or more intense consequences than positive events of
comparable magnitude. Anecdotally, human beings usually ask to hear the bad
news first, and bad news sells more newspapers. Testing whether attentional
resources are automatically directed away from the current task when inessen-
tial good or bad traits are present, Pratto and John (1991) find that a bad extra-
neous stimulus attracts more attention in an automatic and nonintentional
* The author is grateful to Stefano DellaVigna, Simon Gervais, Isaac Hacamo, Ulrike Malmendier,
Thomas Mertens, Atif Mian, Terrance Odean, Richard Stanton, Adam Szeidl, Paul Tetlock, Hal Var-
ian, and Wei Xiong for helpful comments. He also acknowledges financial support from Fondecyt
Iniciación (No. 11130647), Fondecyt Regular (Nos. 1160048 and 1171894), and Nucleo Milenio
Research Center for Entrepreneurial Strategy under Uncertainty (No. NS130028). Part of the work
was completed while the author was at UC Berkeley.
fashion than a good stimulus. And in a study of how long positive or negative
everyday events continue to impact a person’s mood, Sheldon et al. (1996) con-
clude that negative information takes longer to process and contributes more to
the creation of impressions than positive information.
In this paper, we relate the negative–positive attention asymmetry found in
psychology to stock market behavior. We argue that negative stock market per-
formance draws more attention than comparable positive performance. Specifi-
cally, we measure performance using stock returns and test the hypothesis that
retail investors pay more attention to extreme negative returns than to extreme
positive ones.
There is an inherent challenge in directly measuring attention and its alloca-
tion across tasks. We measure attention in the stock market using Google Trends,
which provides a search volume tool that is a powerful proxy of attention for
two reasons. First, it is common for internet users to search for information using
Google, so the results of Google Trends are truly representative of their interest
in a topic. Additionally, since searching for a term on Google obviously requires
paying attention to it, search volume from Google Trends is a better proxy for
attention than alternative instruments used in the literature previously.
The results of Google’s search volume tool are expressed in terms of the
search volume index (SVI). The SVI for a search term is the percentage of
searches for that term throughout 1 week within a geographical region, scaled
by its time-series maximum. Data are available from January 2004 for most
common terms used in Google searches.
Multiple authors have used this data in different areas for modeling and pre-
diction. Ginsberg et al. (2008) employ Google’s indexes to predict flu outbreaks
more efficiently than the Centers for Disease Control and Prevention (CDC).
Choi and Varian (2012) use it to predict sales and tourism. Da et al. (2011) pro-
vide support for the Barber and Odean (2008)‘s price pressure hypothesis using
search data on ticker symbols. Da et al. (2015) use search volume to measure
investor sentiment and show that decreases in search volume are correlated
with price increases, which then reverse in the short term. Campos et al. (2017)
use search volume to model and predict the oil’s VIX, finding that search data
significantly increases the returns of volatility-exposed portfolios.
In this paper, we use three aggregate measures of investor attention to the
stock market based on Google search volume data. The first measure is Atten-
tion to the Stock Market (StockMarket), defined as the sum of the SVI values for
a series of terms such as “stock market” or “best stocks” that investors typically
search when seeking general information about the whole stock market. The
second measure, attention from potential market entrants (OnlineTrading), is
the sum of the SVI values for a series of terms such as “online trading,” “online
brokerage account,” or “best brokerage account,” and captures the tendency of
potential investors to enter the market, that is, to search for information on
opening a brokerage account. Finally, attention from existing investors (Etrade)
is a measure of retail investors who already have a brokerage account and use
Google to access its webpage and log in. It is defined as the sum of the SVI
In sum, we show that the negativity bias in attention allocation with respect
to extreme stock returns exists above and beyond the effects of asymmetric
media coverage, trading volume, and asymmetric return distributions. There-
fore, we argue that this bias stems primarily from a psychological negative–
positive attention asymmetry.
The negativity bias documented in this paper may provide alternative expla-
nations for the evidence presented by Hirshleifer et al. (2008) and Barber and
Odean (2008). Hirshleifer et al. (2008) show that individuals are net buyers after
negative and positive earning surprises and that the level of net purchases is far
greater after extreme negative earnings surprises than extreme favorable ones.
They claim that these facts provide support for the hypothesis that individual
investors cause post-earnings-announcement drift. Similarly, Barber and Odean
(2008) argue that retail investors are net buyers of attention-grabbing stocks
and that average buy–sell imbalances are greater after negative return days than
positive ones. Possible explanations provided by the authors for this asymmetry
are Shefrin and Statman (1985)‘s disposition effect1 and the execution of limit
orders; however, due to the unavailability of data, no further tests were per-
formed to ascertain the cause. In the presence of a negativity bias in attention
allocation, negative stock market performance will attract more attention than
comparable positive performance. Since high attention is linked to net buying,
this asymmetry could partially explain why the levels of net purchases or buy–
sell imbalances are higher after extreme unfavorable earnings or negative
returns than after extreme favorable earnings or positive returns.
The remainder of this paper is organized as follows. Section II describes the
data sources, the determination of the search terms and the specification of the
attention variables based on Google SVIs. Section III compares our attention
measures to alternative proxies. Section IV relates US-, state- and company-level
measures of attention to extreme returns. Section V checks the robustness of
the results. Finally, Section VI presents our conclusions.
When internet users visit the Google website,2 they begin by entering a search
term. Examples of the most commonly used search terms for any date are avail-
able at Google Hot Searches.3 Each day, Google tracks the amount of searches
for every term and their geographical origin. This time-series search volume
data is formally called SVI.
Google provides SVI data for individual search terms and queries (groups of
at most five terms) through a product called Google Trends. Results can be fil-
tered by country, city, state, or county, going back to 2004. The data is propor-
tional to the number of searches performed for a particular term within a
j j
SVT r , t SVT r , t
j
SVI r , t = = n o ð1Þ
TSV t × MSV r , t TSV t × maxfq, ig SVT ri , q =TSV q
j
where SVT r , t is the search volume for term j in period t within region r, TSVt is
the total search volume in Google (i.e., for all terms combined) at period t, and
MSVr,t is the maximum among all the SVT-to-TSV ratios for the terms in the
query and within the Google data availability sample period.
The search volume is divided by TSVt to eliminate any trends that could be
the result of a change in the number of Google users, and also by MSVr,t to scale
the time series and avoid revealing the raw search numbers. The SVI for a
search term is therefore, as previously mentioned, proportional to the percent-
age of searches for that term during a particular period of time and within a
geographical region.
In this paper we use three aggregate measures of investor attention to the
stock market based on Google search volume data: StockMarket, OnlineTrading,
and Etrade.
repeat the process of retrieving related terms and dropping irrelevant ones with
this interim list to get the definitive list shown in column 1 of Table 1.
We then enter these terms manually into Google Trends5 to find the one
with the largest SVI, which will be the initial term in each of the queries we use
to download data. This is done to make sure Google scales each time series
using the same value for MSVr,t in equation (1) so they can be easily aggregated.
For each query, we collect weekly data for the United States and each of the
lower 48 states using a web crawling program that inputs each term and geo-
graphical region into Google Trends and downloads the resulting SVI data into
a CSV file.
The SVI for “stock quotes,” “stock prices,” and “best stocks,” three of the
terms in the first column of Table 1, are shown in the top panel of Figure 1. As
can be seen, their search volumes are positively correlated. All three display a
spike in late September 2008 just after Lehman Brothers declared bankruptcy,
suggesting that negative events draw much attention. The SVI for the first two
terms have decreased over time (probably due to the growing popularity of
websites such as Yahoo or Google Finance where similar information can be
found) and show some annual seasonality.
Unfortunately, Google does not return a valid SVI for some terms in some
geographical regions. If a term is rarely searched for in a given state, Google
Trends may return only zeros or simply drop the term from its output. Thus,
after attempting to download all the data, we only obtained 91,471 term-week-
region data points, which is 39% of the maximum attainable. Finally, since we
want a unique measure of retail investors’ attention to the stock market for
each region, we aggregate the terms as follows:
X j
StockMarket r , t = SVI r , t 8r,t ð3Þ
j2J
The bottom panel in Figure 1 shows the SVI over time for three of the final
terms, namely, “best online trading,” “online broker,” and “online stock trading.”
As in the top panel, search volumes are for the United States as a whole and are
positively correlated. However, the SVI reflecting attention from potential market
entrants, which compose the measure OnlineTrading, are more volatile, show no
seasonality and are less frequently searched. The downloaded data yielded a total
of 31,011 term-week-region points, only 17% of the maximum possible.
We now aggregate the SVI across terms to compute a combined measure of
attention as in equation (3) but with J now representing the set of terms in col-
umn 2 of Table 1. The bottom panel in Figure 2 corroborates that the data for
OnlineTrading (across states) are scarcer than the data for StockMarket and are
available only for 14 states.6
6 CA, FL, GA, IL, MA, MI, NJ, NY, NC, OH, PA, TX, VA, and WA.
1
stock quotes
0.9 stock prices
best stocks
0.8
0.7
Seach Volume Index
0.6
0.5
0.4
0.3
0.2
0.1
0
2005 2006 2007 2008 2009 2010
Year
1
best online trading
0.9 online broker
online stock trading
0.8
0.7
Search Volume Index
0.6
0.5
0.4
0.3
0.2
0.1
0
2005 2006 2007 2008 2009 2010 2011
Year
WA(100)
ME(60)
MT ND NH(75)
MN(74) VT
OR(60) ID(61) MI(100)
WI(62) MA(100)
NY(100)
RI(61)
CT(59)
SD
WY PA(100)
IA(75) NJ(100)
NE(76) DE
OH(100) MD(74)
NV(82) UT(77) IL(100)
IN(60) WV
CO(73) VA(100)
CA(100) KS MO(72) KY(45)
NC(92)
TN(51)
AZ(75) OK(79) AR(61) SC(77)
NM(61)
GA(100)
MS(60)AL(75)
LA
TX(100)
100%=354 FL
WA(55)
ME
MT ND NH
MN VT
OR ID MI(55)
WI MA(60)
NY(100)CTRI
SD
WY PA(71)
IA NJ(74)
NE OH(62) MDDE
NV UT IL(89) IN WV
CO VA(62)
CA(100) KS MO KY
NC(62)
TN
AZ OK AR SC
NM
GA(59)
MS AL
LA
TX(93)
100%=354 FL(81)
5
x 10
1 2.5
Attention from Potential Market
Entrants
New Accounts (TD Ameritrade)
0.8 2
0.6 1.5
0.4 1
2007Q1 2008Q1 2009Q1 2010Q1
Year
Figure 3
Attention from potential market entrants and real number of
accounts opened.
Notes: The figure presents how quarterly new accounts opened in TD Ameritrade
(as reported on SEC Forms 10-K and 10-Q after 2007) relate to (quarterly) aggregated
SVI for OnlineTrading. Attention from potential market entrants behaves similarly to
the real number of accounts opened in TD Ameritrade, providing support for the
validity of our measure. [Color figure can be viewed at wileyonlinelibrary.com]
In this section, we study how SVI relates to indirect proxies for attention. A key
variable for our analysis is what we refer to as abnormal attention to the stock
market (AStockMarket), defined as follows:
0 1
B StockMarket r , t C
AStockMarket r , t = log@1 + X A: ð4Þ
1 8
StockMarket r, t − q
8 q=1
The mean of StockMarket over the 8 weeks preceding a given moment deter-
mines a reference level of attention for that moment.7 Thus, AStockMarket mea-
sures changes in interest with respect to recent normal levels, with a high (low)
7 Since the AStockMarket measure would be undefined when the mean of StockMarket over the
prior 8 weeks is zero, we add 0.01 to the mean to avoid losing those observations. The same
applies to other Abnormal variables throughout the paper.
WA(100)
ME
MT ND NH
MN(87) VT
OR(95) ID MI(100)
WI(80) MA(100)
NY(100)
RI(51)
CT(85)
SD
WY PA(100)
IA(58) NJ(100)
NE DE
OH(87) MD(94)
NV UT(61) IL(100)
IN(73) WV
CO(91) VA(100)
CA(100) KS(71) MO KY
NC(83)
TN(77)
AZ(100) OK AR SC(71)
NM
GA(89)
MS AL
LA(68)
TX
100%=354 FL
WA(12)
ME(1)
MT(1) ND(1) NH(3)
MN(17) VT(1)
OR(6) ID(1) MI(11)
WI(7) MA(40)
NY(71) RI(2)
CT(15)
SD(1)
WY(1) PA(29)
IA(4) NJ(30)
NE(3) DE(11)
OH(20) MD(12)
NV(5) UT(4) IL(39)IN(9) WV(1)
CO(14) VA(16)
CA(100) KS(4) MO(10) KY(4)
NC(12)
TN(8)
AZ(8) OK(5) AR(3) SC(4)
NM(1)
GA(17)
MS(2) AL(5)
LA(4)
TX(51)
100%=817 FL(26)
De Long et al. (1990) claim that noise trading following periods of extreme
sentiment can create future volatility. Baker and Wurgler (2007) use the CBOE
market volatility index (VIX), a popular measure of the implied volatility of S&P
500 index options, to proxy for aggregate market sentiment. Consequently, we
will also use the abnormal VIX (AVIX) as an alternative proxy for attention:
0 1
B AVIXt C
AVIXt = log@1 + X A
1 8
AVIX t −q
8 q=1
Table 2 Correlations
AStockMarkett AOnlineTradingt AEtradet AVlmt AVIXt
AStockMarkett 1
AOnlineTradingt 0.675*** 1
AEtradet 0.643*** 0.782*** 1
AVlmt 0.445*** 0.266*** 0.302*** 1
AVIXt 0.542*** 0.343*** 0.193*** 0.304*** 1
Notes: AStockMarket is Abnormal Attention to the Stock Market and measures general interest in
the stock market, stock prices and investment opportunities. AOnlineTrading is abnormal atten-
tion from potential market entrants and proxies for individuals who are looking for information
on opening a brokerage account. AEtrade is abnormal attention from existing investors and con-
cerns retail investors who already own a brokerage account and use Google to get to its website.
All three measures are computed using weekly search volume from Google at the aggregate US
level. AVlm is Abnormal Trading Volume. Data on trading volume is for a value-weighted portfo-
lio consisting of all stocks in CRSP. AVIX is abnormal VIX, the CBOE market volatility index that
measures the implied volatility of S&P 500 index options. The sample period is from January
2004 through December 2010. ***, **, and * represent significance at the 1%, 5% and 10% levels.
As for our measure of attention from existing investors, AEtrade, not surpris-
ingly it exhibits a smaller correlation with AVIX and also a relatively low corre-
lation with AVlm. One obvious explanation for this is that, unlike the other
two measures, when people use the search terms related to AEtrade they may
not be seeking information but merely using Google to help them log in to the
brokerage websites (that some of them may have bookmarked in their web
browsers).
This section contains the core of our analysis, in which we relate our abnormal
attention measures to stock returns. More specifically, we test the extent to
which the attention measures defined above respond to stock returns of differ-
ing magnitudes. This is done using three different but complementary regres-
sion specifications set out in the following subsections. In the first
specification, we explore the relationship between lagged returns and stock
market attention at the US level; in the second, we consider the same relation-
ship at the state level; in the third, we examine whether similar patterns are
present at the company level.
A. US level
For the US-level specification, we begin by sorting the returns into quintiles
q (i.e., 20% partitions) and then construct five level variables as follows:
q
Ii Ret t = 1fRet t 2 qi g, 8i 2 f1,…,5g ð6Þ
q q
Pi Ret t = Ret t × Ii Ret t , 8i 2 f1,…,5g ð7Þ
q
Thus, P1 Ret t is equal to Rett if Rett is among the lowest 20% of the returns
during the sample period, and zero otherwise. This implies that
X
5
q
Pi Ret t = Ret t
i=1
q q
and by construction, P1 Ret t will contain extreme negative returns and P5 Ret t
extreme positive returns.
To test our main hypothesis we run the following time-series regression
specification:
X
5
0
AAttentiont = α + βi f ði,t Þ + QFE δ + εt ð8Þ
i=1
Standard errors are computed using Newey and West (1987) with three
lags to address autocorrelation and heteroskedasticity. The variables are nor-
malized by dividing them by their standard deviation, so that the coeffi-
cient represents the change in the dependent variable for a single standard
deviation change in the predictor variable. The t-test results are in
parentheses.
The results of the level regressions are presented in panel (a) of Table 3 and
those of the sensitivity regressions in panel (b) of the same table. In both
panels, columns 1, 2, and 3 show the results when AAttention is the measure
AStockMarket, AOnlineTrading, or AEtrade, respectively.9
In the level regression in panel (a) of Table 3, all coefficients are positive and
significant at the 1% level, reflecting the fact that market events grab investors’
attention. The coefficients for the lowest quintile are, in general, higher than
those for the other quintiles, except for AEtrade. When AStockMarket is the mea-
sure of investor attention, in column 1, the lowest-quintile regression coeffi-
cient is 3.131 and the highest is 2.952. This is a 6.1% difference in abnormal
attention to the stock market for the same variation in the two extremes of the
return distribution (in terms of standard deviation).
Column 2, representing attention from potential investors, shows a smaller
difference between the coefficients of the lowest and highest quintiles, suggest-
ing that AOnlineTrading has a smaller negativity bias. For AEtrade, the relation-
ship between the coefficients of the lowest- and highest-quintiles flips; this is
consistent with the ostrich effect documented by Karlsson et al. (2009), accord-
ing to which existing investors monitor their brokerage accounts more fre-
quently after positive news than after negative news, a factor that should
counterbalance any negativity bias. A caveat on this point, however, is that our
Etrade measure may be a noisy proxy compared to Karlsson et al. (2009)‘s
measure.
Wald tests performed on our results for AStockMarket reject the hypothesis
that the coefficient associated with the lowest quintile is equal to or lower than
the one associated with the highest quintile (p-value of 0.07%.) For AOnline-
Trading, the results are similar, but marginally significant, with a p-value of
13.9%. For AEtrade, however, the same hypothesis cannot be rejected, which is
again consistent with the ostrich effect documented by Karlsson et al. (2009).10
As for the sensitivity regression presented in panel (b) of Table 3, the first
and second columns show that AStockMarket and AOnlineTrading display the
greatest amount of sensitivity to a change in returns when the latter are at an
extreme level. Negative extreme returns have negative coefficients, so changes
in returns towards the negative extreme grab investors’ attention more
intensely. In column 1, when attention is proxied by AStockMarket, the coeffi-
cient for the lowest quintile is −0.341, which is significantly different from zero;
the coefficient for the highest quintile is not statistically different from zero.
Therefore, our results confirm that a change in lagged negative aggregate
returns has a stronger and more statistically significant impact on attention to
the stock market than a change in positive returns.
9 We obtain similar results when Rett are returns from a value-weighted portfolio of all stocks
in CRSP.
10 Similar untabulated results are obtained when using deciles, ventiles or centiles rather than
quintiles in the regression specified by (8). For AStockMarket, Wald tests performed on dec-
iles, ventiles and centiles also reject the hypothesis that the coefficient of the most negative
group is equal to or lower than that of the most positive group; the p-values are 1.7%, 1.0%,
and 2.0%, respectively. For AOnlineTrading, the results are similar, with p-values of 7.2%,
2.3%, and 5.7% for deciles, ventiles and centiles, respectively.
B. State level
We now specify the state-level regressions, which are similar to the US-level time
series specification (8) but use panel data. AStockMarket, AOnlineTrading, and
AEtrade are constructed as defined in equation (4) using state-level SVI data.
We begin by sorting companies by state, using company location codes from
Compustat to identify the locations of each firm’s headquarters. The geographi-
cal distribution of the companies by state is shown in the bottom panel of
Figure 4. The numbers in parentheses are the average number of companies
headquartered in each state relative to the national maximum, which is 817 in
California (CA). For example, New York (NY) has 71% × 817 = 580 and Texas
(TX) has 51% × 817 = 417. The states with darker colors have more companies.
We next construct, for each state and week, a portfolio of high-market capitali-
zation (highest quartile) in-state companies. In general, the number of compa-
nies in each such portfolio differs from state to state. Since the purpose of the
portfolios is to reduce noise, states with very few firms (i.e., less than 20) are dis-
carded. We sort the returns on these portfolios into quintiles as in equation (7).
The state-level regressions are specified in (9) and (10) below and the corre-
sponding results are given in panels (a) and (b) of Table 4, respectively. The first
column in panel (a) of Table 4 reports estimates of βi in:
X
5
q 0 0 0
AStockMarket s, t = βi Ii Ret in
s, t −1 + Controls γ + SFE δ1 + QFE δ2 + εs, t ð9Þ
i=1
11 Similar untabulated results are obtained when using deciles, ventiles and centiles instead of
quintiles. For AStockMarket, Wald tests performed on deciles, ventiles and centiles reject the
hypothesis that the coefficient associated with the most negative group is equal to or lower
than that of the most positive group; the p-values are <0.1%, < 0.1%, and 0.5%, respectively.
For AOnlineTrading and AEtrade, the results are similar, with p-values <0.1% for deciles,
ventiles and centiles.
Panel (b)
q
P1 Ret in
t −1
−0.193*** (−4.11) −0.183*** (−3.31) −0.146*** (−3.78)
q
P2 Ret in
t −1
−0.0166* (−1.91) −0.00942 (−0.32) 0.000585 (0.05)
q
P3 Ret in
t −1
0.0100 (0.89) 0.0184 (1.32) 0.0136 (1.01)
q
P4 Ret in
t −1
0.0198*** (2.70) −0.0123 (−0.50) −0.0195** (−2.08)
q
P5 Ret in
t −1
0.00150 (0.07) 0.0252 (0.83) −0.0112 (−0.35)
The first column in panel (b) of Table 4 reports the estimates of βi in:
X
5
q 0 0 0
AStockMarket s, t = α + βi Pi Ret in
s, t −1 + Controls γ + SFE δ1 + QFE δ2 + εs, t ð10Þ
i=1
q
where all sensitivity variables, Pi Ret t , are demeaned within their own quintile
groups as in the US-level specification.
Columns 2 and 3 of the two panels show the results of the equivalent regres-
sion specifications using AOnlineTrading and AEtrade as the dependent variables
instead of AStockMarket.
SFE and QFE are state and quarter fixed effects, respectively. Quarter instead of
week dummies are used given that the effect we are trying to capture is not
purely cross-sectional, as shown in the previous section. The state controls,
obtained from the St. Louis Federal Reserve Bank, are the following monthly
variables: (i) the coincident economic activity index, to summarize current eco-
nomic conditions; (ii) the leading index, to predict the 6-month growth rate of
a state’s coincident index; and (iii) the unemployment rate. In the sensitivity
regression we double cluster standard errors by state and week. In the level
regression, since we drop the constant, we cluster standard errors by state.12
As in the US-level regression, columns 1 and 2 of panels (a) and (b) in
Table 4 show that AStockMarket and AOnlineTrading are most sensitive to
extreme returns. In panel (a) the coefficients for the lowest quintile are, in gen-
eral, higher than those for the other quintiles, except for AEtrade.
In panel (b), negative extreme returns have significant and negative coeffi-
cients and positive extreme returns have coefficients not statistically different
from zero. More importantly, lagged extreme negative returns have larger coef-
ficients (in absolute value) than extreme positive returns. AEtrade, in column
3, is again the group that exhibits the least negativity bias in both the level and
sensitivity regressions, as measured by the difference in absolute values between
the coefficients in rows 1 and 5.
For all measures of attention, Wald tests reject the hypothesis that the coeffi-
cient associated with the lowest quintile is equal to or lower than the one asso-
ciated with the most positive extreme, with p-values <5% for all columns in
panel (a), and <1% for all columns in panel (b). However, significance levels for
AEtrade (column 3 in both panels) are lower than those for AStockMarket and
AOnlineTrading. These findings are consistent with our previous US-level results,
which support the existence of a negativity bias in attention allocation and find
that this bias is stronger for the measures ASTockMarket and AOnlineTrading.13
12 Petersen (2009)‘s implementation of Cameron et al. (2012)‘s procedure does not allow to
double cluster without a constant intercept.
13 The results remain similar when using deciles, ventiles, and centiles in the level regressions
and when using deciles and ventiles in the sensitivity regressions, with p-values <1% in all
cases.
C. Company level
In this section, we test whether the negativity bias documented in the previous
sections at the aggregate United States and state levels also exists for specific
stocks. Our sample consists of the 100 largest companies in the S&P 500 index
as measured by market capitalization for which we have complete data. Simi-
larly to the previous abnormal attention measures we define ATicker as:
0 1
B Ticker c, t C
ATicker c, t = log@1 + X A
1 8
Ticker c, t − q
8 q=1
where Tickerc,t is search volume during week t for the ticker symbol associated
with company c and ATickerc,t measures changes in attention with respect to
the normal level.
For each company we also download daily returns, trading volume, price,
and number of shares outstanding from CRSP, and compute their respective
weekly values. Weekly trading volume, Vlm, is defined as the sum of daily trad-
ing volume during the week, and abnormal trading volume, AVlm, is
defined as:
0 1
B V lmc, t C
AV lmc, t = log@1 + X A
1 8
V lm c , t − q
8 q=1
Weekly returns are holding period returns from market close on a given
Friday to market close on the next Friday. Weekly market capitalization, Mcap,
is the price at the end of the week times number of shares outstanding at the
end of the week. Log market capitalization, LMcapc,t, is defined as log(Mcapc,t).
Additionally, we compute the fraction of shares held by institutional investors,
InstOwn, using quarterly data from Thomson Reuters Institutional (13f ) Hold-
ings Database; missing values are filled with zeros.
News coverage is obtained from LexisNexis Academic. Following Drake
et al. (2012), we count the number of news articles, Newsc,t, in the Wall Street
Journal, the New York Times, USA Today, and the Washington Post that mention
firm c during week t. Then, we define an abnormal number of news articles,
ANews, as:
0 1
B Newsc, t C
ANewsc, t = log@1 + X A
1 8
News c , t − q
8 q=1
Similarly to the previous subsections, we sort the weekly returns into quin-
tiles q as in equation (7); in this case, Retc,t is the weekly return on company c at
week t. We also sort the weekly returns into deciles d as a robustness check.
Table 5 shows the results for two different specifications of the following panel
regression:
X
N
ATicker c, t = βi Ii Ret c, t − 1 + Controls0 γ + Q 0FE δ1 + C0FE δ2 + εc, t : ð11Þ
i=1
X
N
ATicker c, t = α + βi Pi Ret c, t − 1 + Controls0 γ + QFE0 δ1 + C0FE δ2 + εc, t : ð12Þ
i=1
q
where all sensitivity variables, Pi Ret t , are demeaned within their own quintile
groups as in the US- and state-level specification.
In the above two regression specifications, N may take the value 5 or 10, for
quintile and decile partitions, respectively. CFE and QFE are company and quar-
ter fixed effects, respectively. Controls used are LMcap, InstOwn, AVlm, and
ANews, as defined previously in this section. In the sensitivity regression we
double cluster standard errors by company and week. In the level regression,
since we drop the constant, we cluster standard errors by company.14
Paralleling what we found in earlier sections, Tables 5 and 6 show that an
increase in retail investors’ attention, as measured by ticker symbol searches, is
associated with extreme company returns during the previous week. In general,
coefficients (in absolute values) are larger and more significant for the extreme
quintiles (first column in each tables) and extreme deciles (second column).
Moreover, across all specifications, lagged negative returns are stronger predic-
tors of attention than positive returns. Wald tests performed on the decile
results of the level regression and the quintile and decile results of the sensitiv-
ity regression reject the hypothesis that the coefficient associated with the most
negative extreme (in absolute value) is equal to or lower than the one associated
with the most positive extreme at the 5% level for both tables.15
Both tables also show that attention at the stock level is positive and signifi-
cantly correlated with abnormal trading volume and abnormal news articles.
The result for abnormal trading volume is consistent with what we reported at
the US level in Section III above. The results do not, however, reveal a strong
relationship between attention and market capitalization or institutional own-
ership. In our view, the former is not surprising, since we are already control-
ling for market capitalization in the way we choose firms for our sample.
These findings for individual stocks reinforce the main contribution of this
paper. Investors display a negativity bias in attention allocation with respect to
extreme stock returns, even after controlling for known predictors of attention
14 Petersen (2009) implementation of Cameron et al. (2012)‘s procedure does not allow for
double clustering without a constant intercept.
15 The results remain similar when using ventiles and centiles in the level and sensitivity
regressions, with p-values of <0.1% for the level regressions, and 3.2% and 7.6% for ventiles
and centiles, respectively, in the sensitivity regressions.
such as news coverage and trading volume. This relationship is robust to differ-
ent specifications and holds at the aggregate and company-specific levels for
large US firms.
V. ROBUSTNESS CHECKS
A. Institutional ownership
Da et al. (2011) find that SVI most likely measures individual, rather than insti-
tutional, investors’ attention. Therefore, the patterns we find in Section IV.C
should be more pronounced among companies with low institutional owner-
ship. To confirm this hypothesis, we split our sample of firms into low- and
high-institutional ownership groups, based on the median of the variable Ins-
tOwn.16 Tables 7 and 8 show the results of the analyses from column 2 of
Tables 5 and 6 for the low-ownership group (column 1) and the high-
ownership group (column 2).
Results show that the negativity bias is present in both the low- and high-
institutional ownership groups; however, it is more pronounced within the for-
mer. Although a Wald test for the difference between the lowest-highest decile
gaps in columns 1 and 2 is insignificant, several findings support the existence
of a difference between the two groups. Column 1 in both tables shows larger
coefficients (in absolute value) than column 2; significance values associated
with the extreme decile coefficients are larger in column 1 than in column 2;
and column 1 exhibits a larger difference between the two extreme decile coeffi-
cients (in absolute value) than column 2. In other words, the negativity bias
found in previous sections seems to be amplified among companies with a
larger fraction of individual investors, consistent with Da et al. (2011)‘s
findings.
16 For ease of comparison with previous results, the level and sensitivity variables, IiRetc,t and
PiRetc,t, remain sorted as in previous sections, that is, they are not recomputed conditional
on the institutional ownership split.
17 For ease of comparison with previous results, the level and sensitivity variables, IiRetc,t and
PiRetc,t, remain sorted as in previous sections, that is, they are not recomputed conditional
on the trading volume split.
Results for the level regression, in columns 3 and 4 of Table 7, show that the
negative extreme decile coefficients are larger than all other coefficients; how-
ever, the difference between the lowest and highest coefficients is only
volume does attract more investor attention. However, some evidence of the
negativity bias still remains in the low abnormal volume group and this group
exhibits a larger difference between the two extreme decile coefficients. None-
theless, a Wald test for the difference between the lowest-highest decile gaps in
columns 3 and 4 is insignificant.
Regarding the sensitivity regression, results in columns 3 and 4 of Table 8
support the presence of a negativity bias among companies with high abnormal
volume, and show no statistical difference between extreme decile coefficients
for the group of companies with low abnormal volume. A Wald test for the dif-
ference between the lowest-highest decile gaps in columns 3 and 4 is significant
at the 1% level. In other words, results show that investors display the greatest
amount of sensitivity to a change in extreme returns when this change is
accompanied by high volume.
C. News coverage
We argue that the negativity bias in attention allocation comes from the effect
of negative events on investors’ psychological state. However, it is also possible
that negative events receive more media coverage, and that investors search for
market information more actively when exposed to this amplified media cover-
age when such events occur. If this is the case, we should also see the presence
of a negativity bias in news coverage. To test this alternative hypothesis, we use
analog regression specifications to the ones presented in Section IV.C, but with
ANews as dependent variable and ATicker as one of the controls.
Specifically, column 5 of Table 7 shows the results for the level regression:
X
N
ANewsc, t = βi Ii Ret c, t − 1 + Controls0 γ + Q 0FE δ1 + C0FE δ2 + εc, t : ð13Þ
i=1
X
N
ANewsc, t = α + βi Pi Ret c, t − 1 + Controls0 γ + QFE0 δ1 + C0FE δ2 + εc, t : ð14Þ
i=1
In the above two regression specifications, the Controls are LMcap, InstOwn,
AVlm, and ATicker, as defined in previous sections. Additionally, all sensitivity
q
variables, Pi Ret t , are demeaned within their own quintile groups as in previous
sections.
Contrary to our findings for ASVI in Section IV.C, these results for ANews
show no evidence of a negativity bias in news coverage. Results for the level
regression, in column 5 of Table 7, show no significant coefficients. Moreover,
the extreme negative decile coefficient is lower in value than its positive coun-
terpart, which, if it were significant, would be consistent with a positivity bias
D. Distribution of returns
Positive and negative returns are not symmetrical events for stockholders. For
example, it is possible (albeit unlikely) that investors get a positive return on
their investment of more than 100%. However, even in the worst of crises, neg-
ative returns are always lower (in absolute value) than 100%. It is therefore a
valid concern that this potential asymmetry may cause skewness and drive our
negativity bias result.
Another concern arises from the choice of sample period. Because of data
availability, the sample period used here overlaps with the 2008–2010 financial
crisis, meaning that our sample may have more negative than positive return
outliers. These negative outliers could also be influencing the results.
The sets of returns used throughout this paper are displayed in six histo-
grams in Figure 5. The three left-hand plots—US-level at the top, state-level in
the middle, company-level at the bottom—demonstrate that there are more
negative than positive returns in our sample. Both negative and positive out-
liers seem fairly symmetric in the in-state and company returns; in the United
States returns, negative outliers are larger (in absolute value) than positive ones.
In quantitative terms, pooled aggregate returns in our sample are negatively
skewed at −0.72 for US-level returns and −0.13 for state-level returns. Con-
versely, pooled company-level returns are positively skewed at 0.69. All samples
have positive kurtosis at 10.86, 14.36, and 19.96 for US-, state-, and company-
level returns, respectively.
The quintile returns partitions used in our regressions partially account for
some of the problems mentioned above. An alternative and complementary
solution is to redistribute negative returns to replicate the distribution of posi-
tive returns, or vice versa. This can be done for each week and portfolio
(or stock) by applying the following procedure:
90 90
80 80
70 70
60 60
Density
Density
50 50
40 40
30 30
20 20
10 10
0 0
−0.25 −0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2 0.25 −0.25 −0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2 0.25
Original Return Transformed Return
6000 6000
5000 5000
4000 4000
Density
Density
3000 3000
2000 2000
1000 1000
0 0
−0.5 −0.4 −0.3 −0.2 −0.1 0 0.1 0.2 0.3 0.4 0.5 −0.5 −0.4 −0.3 −0.2 −0.1 0 0.1 0.2 0.3 0.4 0.5
Original Return Transformed Return
4 4
x 10 x 10
12 12
10 10
8 8
Density
Density
6 6
4 4
2 2
0 0
−2 −1.5 −1 −0.5 0 0.5 1 1.5 2 −2 −1.5 −1 −0.5 0 0.5 1 1.5 2
Original Return Transformed Return
Thus, for a given rolling window in which the current negative return is the
most negative one and the maximum positive return is x, the above procedure
replaces the current negative return with −x. Basically, the procedure modifies
each negative return, reshaping the 5-year rolling window return distribution
to be more symmetrical.18
This transformation of the original returns plotted in the histograms on the
left side of Figure 5 is shown for each case in the corresponding right-hand his-
togram. The densities for the positive range of returns (i.e., the positive side of
each plot) remain unchanged, given that new values are assigned only to nega-
tive returns. Overall, the transformed histograms seem more symmetrical and
balanced than the original ones in terms of outliers. Quantitatively, all skew-
ness values are now positive and larger (0.74 for US returns, 0.84 for state
returns and 0.73 for company-level returns) and the corresponding kurtosis
values are smaller (6.92, 13.43, and 18.66, respectively).
To test the robustness of the results after performing the transformation to
redistribute the returns, we rerun all previous regressions. The new results are
given in Tables 9 and 10; to simplify the presentation, only the company level
is shown. In general terms, these data show a higher economic significance of
the coefficients associated with extreme negative and positive returns in the
level regression and a lower significance (in absolute terms) for the sensitivity
regression. Consequently, the average difference between the coefficients for
the lowest and highest quintiles is also larger for the level regression and smal-
ler (but still positive) for the sensitivity regression. Therefore, after the transfor-
mation, the negativity bias in attention allocation remains.
VI. CONCLUSION
Psychology research supports the notion that negative events will produce
larger, more consistent or more intense consequences than positive events of
comparable magnitude. This negativity bias suggests that negative information
creates stronger impressions and attracts more attention in an automatic, unin-
tentional fashion than positive information.
This study related this negative–positive attention asymmetry to stock mar-
ket behavior. We argued that negative stock market performance attracts more
attention from retail investors than comparable positive performance. Specifi-
cally, we tested the hypothesis that individual investors pay more attention to
extreme negative than extreme positive returns.
Investor attention was measured using Google’s internet SVIs, a more direct
proxy for attention than traditional measures like trading volume, volatility,
and so on. From the SVI data, we constructed aggregate measures for three dif-
ferent types of attention, based on data from the United States as a whole as
well as individual states. StockMarket proxies for attention to the entire stock
market, OnlineTrading captures attention from potential market entrants, and
Etrade is associated with existing investors who own a brokerage account and
use Google to access it.
18 We also tried making the cross-sectional distribution (in the case of state- and company-
level returns) more symmetrical, with similar results.
predictors than extreme positive returns of investor attention to the stock mar-
ket. State-level measures delivered similar results.
We also tested whether the negativity bias present at the United States and
state levels also exists at the company level. Attention to specific companies
was measured using the SVI data for their ticker symbols in a sample of
100 large firms in the S&P 500. The results demonstrated that asymmetry in
attention allocation also held in the case of specific stocks case as individual
investors paid more attention to extreme negative returns affecting individual
companies than to comparable positive returns.
In general terms, our empirical results strongly support the idea that inves-
tors display a negativity bias in attention allocation with respect to extreme
stock returns. Across all specifications, a change in lagged negative extreme
returns generated a stronger increase in attention than a change in lagged posi-
tive extreme returns.
Finally, we performed several robustness checks to show that the negativity
bias in attention allocation with respect to extreme returns exists above and
beyond the effects of asymmetric media coverage and trading volume. We also
rule out the possibility that negative returns are stronger simply because they are
more unusual or because negative and positive returns are not symmetrical events
to the holder in terms of their distribution or number or the value of outliers.
Tomas Reyes
Department of Industrial and Systems Engineering
Pontificia Universidad Católica de Chile
Vicuna Mackenna 4860
Santiago
Chile
threyes@ing.puc.cl
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