Extreme Dependence in Investor Attention and Stock Returns - Consequences for Forecasting Stock Returns and Measuring Systemic Risk

Quantitative Finance, Forthcoming

53 Pages Posted: 20 Jun 2019

See all articles by Marcus Scheffer

Marcus Scheffer

University of Dortmund - Economics and Social Sciences

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: June 13, 2019

Abstract

We characterize co-movements in investor attention by modeling multivariate internet search volume data. Using a variety of copula models that can capture both asymmetric and skewed dependence, we find empirical evidence of strong non-linear and asymmetric dependence in the attention investors give to companies. Modeling three years of daily stock returns and search volumes from Google Trends for 29 bank names, we find a striking similarity between the dependence structure inherent in stock returns and the dependence in the corresponding time series of search queries. We then document the existence of significant asymmetric and skewed tail dependence in the joint distribution of stock returns and investor attention. Finally, stock returns and internet search volumes appear to evolve concurrently in real time with neither one leading the other. Our findings have important implications, e.g., for the analysis of banks' interconnectedness based on equity data and the pricing of investor attention in the cross-section of stock returns.

Keywords: dependence structures, tail dependence, investor attention, Google Trends

JEL Classification: C58, G02, C01

Suggested Citation

Scheffer, Marcus and Weiss, Gregor N. F., Extreme Dependence in Investor Attention and Stock Returns - Consequences for Forecasting Stock Returns and Measuring Systemic Risk (June 13, 2019). Quantitative Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3403434

Marcus Scheffer

University of Dortmund - Economics and Social Sciences ( email )

United States

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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