News co-occurrence, attention spillover, and return predictability

• Main Authors: GUO, Li, PENG, Lin, TAO, Yubo, TU, Jun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Investors attention; Network; Return predictability; Short-sales constraint; Media coverage; News tones; Heterogeneous belief; Econometrics; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/soe_research/2049; https://ink.library.smu.edu.sg/context/soe_research/article/3048/viewcontent/News_co_occurrence_2018_wp.pdf
• Institution: Singapore Management University

We examine the effect of investor attention spillover on stock return predictability. Using a novel measure, the News Network Triggered Attention index (NNTA), we find that NNTA negatively predicts market returns with a monthly in(out)-of-sample R-square of 5.97% (5.80%). In the cross-section, a long-short portfolio based on news co-occurrence generates a significant monthly alpha of 68 basis points. The results are robust to the inclusion of alternative attention proxies, sentiment measures, other news- and information-based predictors, across recession and expansion periods. We further validate the attention spillover effect by showing that news co-mentioning leads to greater increases in Google and Bloomberg search volumes than unconditional news coverage. Our findings suggest that attention spillover in a news-based network can lead to significant stock market overvaluations, and especially when arbitrage is limited.