Investor Inattention and the Market Impact of Summary Statistics
Coauthor(s): Thomas Gilbert, Shimon Kogan, Ataman Ozyildirim.
In this paper we identify a unique series of recurring stale information releases and show that the aggregate U.S. stock and Treasury markets respond to its release. The macroeconomic series — the U.S. Index of Leading Economic Indicators (LEI) — is released monthly and constructed as a summary statistic of previously released inputs. We show that a front-running strategy that trades S&P500 futures in the direction of the announcement a day before its release and then trades in the opposite direction of the announcement following its release generates an average annual return of close to 8%. These patterns are more pronounced for high beta stocks, for stocks that are more difficult to arbitrage, and during times when investors' sensitivity to firm-specific stale information is high. Other measures of information arrival, such as price volatility and volume, spike following the release. These empirical findings suggest that limited attention investors fail to recognize that the information in the LEI releases is stale and
that they interpret it as new information, thereby causing temporary yet significant mispricing.
Source: Management Science
Gilbert, Thomas, Shimon Kogan, Lars Lochstoer, and Ataman Ozyildirim. "Investor Inattention and the Market Impact of Summary Statistics." Management Science 58, no. 2 (2012): 336-350.