Sejong University team finds link between retail investor attention, lower stock returns
Summary
A Sejong University research team found that stocks drawing greater attention from retail investors tended to deliver lower returns over the following one to 12 months, based on China’s A-share market from 2012 to 2024. The researchers found that individual investors’ increased attention intensified buying pressure, while institutional investors traded in the opposite direction to correct price imbalances. However, institutional arbitrage weakened when investor attention became excessively high, suggesting limits to that corrective role.
Key Facts
- The team measured investor attention using the Search Volume Index provided by Baidu.
- The paper, titled “The Retreat of Arbitrage Capital: Attention Level and Nonlinear Order Flow Dynamics,” was published last month in the Journal of International Financial Markets, Institutions & Money.
- Lee Eun-mi, a professor at Sejong University’s College of Business and Economics, led the team, with doctoral students Yang Pujian and Yang Liu.
- Yang Pujian was the paper’s first author, Lee was the corresponding author, and Yang Liu was a co-author.
- Yang Liu recently published a paper in the Journal of Behavioral and Experimental Finance, bringing the team’s total to two papers in international academic journals this year.
Findings published in leading international finance journal
From left are Lee Eun-mi, a professor at Sejong University’s College of Business and Economics, and doctoral students Yang Pujian and Yang Liu. Courtesy of Sejong University
A research team at Sejong University has found that stocks attracting greater attention from retail investors tend to generate lower returns in subsequent periods.
The university said the findings were published last month in the prestigious Journal of International Financial Markets, Institutions & Money.
The team was led by Lee Eun-mi, a professor at the university’s College of Business and Economics, and included doctoral students Yang Pujian and Yang Liu.
The paper, titled “The Retreat of Arbitrage Capital: Attention Level and Nonlinear Order Flow Dynamics,” lists Yang Pujian as the first author, Lee as the corresponding author and Yang Liu as a co-author.
The research team examined how retail investor attention affects institutional trading behavior and stock market returns.
The researchers analyzed data from China’s A-share market spanning 2012 to 2024 and measured investor attention using the Search Volume Index (SVI) provided by Baidu, China’s leading search engine.
The analysis found that stocks attracting greater investor attention tend to generate relatively lower returns over the subsequent one to 12 months.
In particular, increased attention from individual investors was found to intensify buying pressure, while institutional investors helped correct price imbalances by trading in the opposite direction.
However, the study also found that institutional investors’ arbitrage activities weakened when investor attention became excessively high, revealing a nonlinear relationship.
This suggests that while institutional investors play a role in correcting market price imbalances, their ability to perform this function may be constrained when individual investor attention exceeds a certain threshold.
The study provides empirical evidence of how institutional investors’ trading behavior and arbitrage activities change depending on the level of investor attention.
By exploring the nonlinear relationship between arbitrage constraints and liquidity provision, which has not been fully examined in previous research, the study contributes to a better understanding of price formation in financial markets and the limitations of arbitrage.
Meanwhile, Yang Liu recently published a paper in the Journal of Behavioral and Experimental Finance, bringing the number of papers Lee’s research team has published in international academic journals this year to two.
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