News Co-Occurrence, Attention Spillover, and Return Predictability

53 Pages Posted: 7 Mar 2017 Last revised: 8 Dec 2018

See all articles by Li Guo

Li Guo

Fudan University - School of Economics; Shanghai Institute of International Finance and Economics

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Yubo Tao

Singapore Management University - School of Economics

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Date Written: November 18, 2018

Abstract

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.

Keywords: Investors attention; Network; Return predictability; Short-sales constraint; Media coverage; News tones; Heterogeneous belief.

JEL Classification: G11, G12, G41

Suggested Citation

Guo, Li and Peng, Lin and Tao, Yubo and Tu, Jun, News Co-Occurrence, Attention Spillover, and Return Predictability (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=2927561 or http://dx.doi.org/10.2139/ssrn.2927561

Li Guo

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Shanghai Institute of International Finance and Economics ( email )

777 Guoding Rd
Wu Jiao Chang, Yangpu District
Shanghai, Shanghai 200017
China

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Yubo Tao

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore

HOME PAGE: http://sites.google.com/site/ybtao1990

Jun Tu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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