Investor Attention, Visual Price Pattern, and Momentum Investing
August 3, 2013 Leave a comment
Investor Attention, Visual Price Pattern, and Momentum Investing
Li-Wen Chen National Chung Cheng University
Hsin-Yi Yu National University of Kaohsiung
July 12, 2013
Abstract:
Since investor attention is limited, stocks that attract attention are more likely to be chosen, while stocks that do not attract attention are often ignored. Given that a visual mode of analysis is more conductive to human cognition than algebraic numbers, we propose that the visual pattern of past prices is a salient signal that attracts investor attention, and thereby boosts returns. The stocks in the winner and loser groups are further classified based on their visual patterns of past prices. We construct a long-short portfolio including the stocks which are more likely to grab investor attention by their discernible visual patterns of past prices. Our long-short portfolio commands a compounded annual risk-adjusted return of 23.1%, almost double the conventional momentum profit. The outperformance holds under various alternative specifications. Moreover, the sheer size of these profits poses a further, significant challenge to the asset pricing literature and the market efficiency hypothesis.
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