Investor attention is a risk pricing factor? Evidence from Chinese investors for self-selected stocks

Abstract

Purpose

The purpose of this paper is to empirically examine whether investor attention is a significant risk pricing factor.

Design/methodology/approach

Using investor attention data from Eastmoney.com, which provides for each stock the number of investors whose watch list includes that stock on a daily basis, this paper constructs a “heat” factor based on the change in investor attention and a “market exposure” factor based on the proportion of attention on a given stock over the attention to all stocks. Using the Fama−MacBeth two-step regression and a rolling analysis, this study examines the ability of the investor attention factor to explain market returns.

Findings

The empirical results show that there exists a risk premium for the “heat” factor and “market exposure” factor that is significantly different from zero. This finding shows that investor attention can systematically influence stock returns, making it a significant risk pricing factor.

Practical implications

This paper’s research on the risk pricing factors of investor attention can help investors to rationally build investment portfolios, avoid risks and form a sound investment concept, which will further reveal the information recognition mechanism of the capital market and standardize the information disclosure behavior of listed companies.

Originality/value

This paper provides evidence that investor attention is a risk pricing factor for the stock market. There are “heat” factors and “market exposure” factors in the Chinese stock market that significantly affect the purchasing behavior of individual investors.

Citation

Dong, D. and Wu, K. (2020), "Investor attention is a risk pricing factor? Evidence from Chinese investors for self-selected stocks", China Finance Review International, Vol. 10 No. 1, pp. 95-112. https://doi.org/10.1108/CFRI-11-2017-0218