ISSN: 2167-0234
Journal of Business & Financial Affairs
Make the best use of Scientific Research and information from our 700+ peer reviewed, Open Access Journals that operates with the help of 50,000+ Editorial Board Members and esteemed reviewers and 1000+ Scientific associations in Medical, Clinical, Pharmaceutical, Engineering, Technology and Management Fields.
 
Meet Inspiring Speakers and Experts at our 3000+ Global Conferenceseries Events with over 600+ Conferences, 1200+ Symposiums and 1200+ Workshops on
Medical, Pharma, Engineering, Science, Technology and Business
 

Inattention in Financial Markets

Srikant Marakani*
Department of Economics and Finance, City University of Hong Kong
*Corresponding Author : Srikant Marakani
Department of Economics and Finance
City University of Hong Kong, Hong Kong
Tel: 852-3442-8450
Fax: 852- 3442-0195
E-mail: smarakan@cityu.edu.hk
Received January 16, 2012; Accepted February 17, 2012; Published February 20, 2012
Citation: Marakani S (2012) Inattention in Financial Markets. J Bus & Fin Aff 1:e108. doi:10.4172/2167-0234.1000e108
Copyright: © 2012 Marakani S. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Visit for more related articles at Journal of Business & Financial Affairs

The role of inattention in financial markets and asset pricing has received significant attention in the last few years. Its importance was brought home to me particularly forcefully on reading, in recent headline news, that the average stock holding time is now just twenty two seconds. Since humans, including even professional traders, are physically incapable of paying continuous attention to news and financial markets at these small time scales, it follows that inattention must pay a vital role in explaining at least the short term movements in the prices of these stocks and assets in general. While the equivalent conclusion for longer time scales does not follow in such an obvious manner, the recent work of Jagannathan and Wang [1] and Jagannathan et al. [2] provide strong evidence that it is important even in time scales of a year or more. Rational inattention is closely related, but distinct, from the concept of transaction costs. While transaction costs are usually the same or similar enough for all investors and are easily measurable, the costs of paying attention are markedly different for different investors and are effectively unobservable in practice. This makes the investigation of this subject challenging both theoretically and empirically. The theoretical foundations for the study of inattention and, in particular, rational inattention were laid in the pioneering work1 of Sims [3,4] and Moscarini [5]. These studies represent some of the many fruitful interactions between information theory and finance. In particular, Sim’s idea of modeling rational inattention in terms of postulating a finite processing capacity (in the sense of Shannon) provides an elegant framework for dealing with rational inattention. More recent studies which have significantly built on this work from the point of view of the investors2 are those of Sims [6], Ricardo [7], Huang and Liu [8], Bacchetta and Eric [9] and Abel et al. [10]. They found, in general, that rational inattention can have a great impact on consumption, portfolio choice and asset prices and that they can explain certain asset pricing puzzles such as the forward discount puzzle in foreign currency markets. As with the study of general transaction costs, the models studied in this area of research are chosen partially on the basis of tractability as generic models are, in general, unsolvable. Hence, from a theoretical point of view, progress still needs to be made and this could provide one possible direction for future research. A more pressing gap in the research agenda for this subject, the lack of time varying attention costs, becomes apparent when the important empirical results of Jagannathan and Wang [1] and Jagannathan et al. [2] are taken into account. They show that, in contrast to conventional wisdom, the consumption CAPM can explain the cross section of stock returns but only if consumption and stock returns are measured from the end of one tax year to the next. The mechanism proposed in the above studies is based on the differing costs of information acquisition or of paying attention to the stock market over the year. At the end of the tax year, investors are forced to study their portfolios and realign them in order to take advantage of tax code provisions. Since this analysis is necessary for other reasons, the marginal cost of paying attention to the market in this period is very low and investors are highly likely to pay attention and process more information during this period. While highly plausible and intuitive, comprehensive theoretical analysis of this hypothesis still remains to be done as solutions for infinite horizon inattention models with time varying attention costs are difficult to obtain. The costs of paying attention to the financial market for average investors also need to be empirically investigated so as to guide theoretical research into this area. Most of the interesting work in this area such as that of Lusardi [11,12], Ameriks et al. [13], Lusardi and Olivia [14] is not directed at addressing this precise issue but only deals with it in a more general context. Hence, a gap does exist in this literature and it will be interesting to see research done to address it. I will end this editorial with the observation that analyzing the costs of paying attention provides a way of incorporating the complications of human behavior into finance in a manner very distinct from conventional behavioral finance. It provides an approach where it is the human limitations and costs of processing information are the key ingredients rather than irrationality. This provides strong constraints and a framework for incorporating human behavior into finance which conventional behavioral finance sometimes lacks. This makes me eagerly look forward to the results of research progress in this area.
1I apologize to the many authors whose important work I have not cited due to the obvious space constraints.
2Mackowiak and Wiederholt (2007) is an interesting application of the concept in relation to firms rather than financial investors.
References
Select your language of interest to view the total content in your interested language
 
Share This Article
   
 
   
 
Relevant Topics
Disc Account
Disc Accountancy and Finance
Disc Accounting Information
Disc Accounting Review
Disc Accounting ethics
Disc Accounting information system
Disc Advertising
Disc Applied Economics
Disc Assessment Scales
Disc Audit
Disc Avenues of Investment
Disc Balance sheet
Disc Banking
Disc Banking Research
Disc Banking Research Studies
Disc Budgeting
Disc Bullion Market
Disc Business
Disc Business Cycle
Disc Business Development
Disc Business Ethics
Disc Business Management
Disc Business Theory
Disc Business and Management
Disc Business organization
Disc Capital Marketing
Disc Capital Markets
Disc Capital Movements
Disc Capital Structure
Disc Chief Marketing Officer
Disc Computable General Equilibrium Model
Disc Corporate Finance
Disc Corporate Governance
Disc Corporate Governance Structure
Disc Cost Accounting
Disc Credit
Disc Currency
Disc Customer Satisfaction
Disc Decision Analysis
Disc Decision Making Process
Disc Deflation
Disc Demand Theory
Disc E-Governance
Disc E-Retailing Market
Disc E-Tourism
Disc E-banking
Disc E-business
Disc Economic Cycle
Disc Economic Growth
Disc Economic Policies
Disc Economic Policy
Disc Economic Resources
Disc Economics Studies
Disc Economy Policy
Disc Electronic Commerce
Disc Emerging Markets Economy
Disc Empirical Analysis
Disc Entrepreneurial Management
Disc Entrepreneuship organization
Disc Exchange Traded Funds
Disc Fair Trade
Disc Finance and accounting
Disc Finance management
Disc Finance of Commodity Markets
Disc Financial Analysis
Disc Financial Crisis
Disc Financial Econometrics
Disc Financial Markets
Disc Financial Reporting
Disc Financial Reporting Standard
Disc Financial Risk
Disc Financial and Nonfinancial Information
Disc Financial plan
Disc Financial valuation
Disc Fiscal and tax policies
Disc Food Service
Disc Foreign Exchange
Disc Global Accounting
Disc Global Market
Disc Gross Domestic Product -GDP
Disc Hotel Management
Disc Human Capital
Disc Human Resource
Disc Income Smoothing
Disc Indexation
Disc Industrial Business
Disc Industrial Policy
Disc Inflation
Disc Information Technology Management
Disc Innovation Management
Disc Intellectual Capital Disclosures
Disc Intellectual property
Disc International Business
Disc International Relations
Disc International finance
Disc Internet role and telecommunications
Disc Investment
Disc Labour Economy
Disc Leadership
Disc Leadership and Organization Behaviour
Disc Macro Economics
Disc Management
Disc Management Accounting
Disc Management Development
Disc Management Information System
Disc Managerial Economics
Disc Manufacturing Operations
Disc Manufacturing and investment
Disc Manufacturing business
Disc Marginal Utility
Disc Market Analysis
Disc Market Equilibrium
Disc Marketing Analysis
Disc Marketing Performance
Disc Marketing management
Disc Marketing-Accounting-Finance Interface
Disc Micro Economics
Disc Monetary Policy
Disc Nasdaq
Disc New Trade Theory
Disc Organizational studies
Disc Panel Data
Disc Parameter Estimation
Disc Primary Market
Disc Production & Operations Management
Disc Profitability
Disc Project and Team Management
Disc Reporting Management
Disc Resource Management
Disc Secondary Market
Disc Small Business
Disc Small Firms
Disc Social Economics
Disc SocioEconomics Status
Disc Statistics
Disc Stock Exchange Business Studies
Disc Stock Market
Disc Stock Market Returns
Disc Stock Return Predictability
Disc Strategic Cost Analysis
Disc Strategic Information
Disc Strategy Management
Disc Talent Management
Disc Taxation
Disc Time Series
Disc Trading
Disc Trading forex
Disc Venture Capital
Disc Wealth Management
Disc Women Entrepreneur
Disc World banking
Disc spreadsheet design
 
Recommended Journals
Disc Entrepreneurship Journal
Disc Hotel Management Journal
Disc Global Economics Journal
Disc Internet Banking Journal
Disc Business Journals
Disc Stock & Forex Trading Journal
Disc Accounting Journal
Disc Economics Journal
Disc Marketing Journal
  View More»
 
Recommended Conferences
Disc Social Media, SEO and Marketing Strategies
September 12-13, 2016 Phoenix, Arizona, USA
View More»
 
Article Tools
Disc Export citation
Disc Share/Blog this article
 
Article usage
  Total views: 3735
  [From(publication date):
July-2012 - May 31, 2016]
  Breakdown by view type
  HTML page views : 7
  PDF downloads :3728
 
 

Post your comment

captcha   Reload  Can't read the image? click here to refresh

 
OMICS International Journals
 
Make the best use of Scientific Research and information from our 700 + peer reviewed, Open Access Journals
 
 
OMICS International Conferences 2016-17
 
Meet Inspiring Speakers and Experts at our 3000+ Global Annual Meetings
 
 

Contact Us

Agri, Food, Aqua and Veterinary Science Journals

Dr. Krish

agrifoodaquavet@omicsinc.com

1-702-714-7001 Extn: 9040

Clinical and Biochemistry Journals

Datta A

clinical_biochem@omicsinc.com

1-702-714-7001Extn: 9037

Business & Management Journals

Ronald

business@omicsinc.com

1-702-714-7001Extn: 9042

Chemical Engineering and Chemistry Journals

Gabriel Shaw

chemicaleng_chemistry@omicsinc.com

1-702-714-7001 Extn: 9040

Earth & Environmental Sciences

Katie Wilson

environmentalsci@omicsinc.com

1-702-714-7001Extn: 9042

Engineering Journals

James Franklin

engineering@omicsinc.com

1-702-714-7001Extn: 9042

General Science and Health care Journals

Andrea Jason

generalsci_healthcare@omicsinc.com

1-702-714-7001Extn: 9043

Genetics and Molecular Biology Journals

Anna Melissa

genetics_molbio@omicsinc.com

1-702-714-7001 Extn: 9006

Immunology & Microbiology Journals

David Gorantl

immuno_microbio@omicsinc.com

1-702-714-7001Extn: 9014

Informatics Journals

Stephanie Skinner

omics@omicsinc.com

1-702-714-7001Extn: 9039

Materials Science Journals

Rachle Green

materialsci@omicsinc.com

1-702-714-7001Extn: 9039

Mathematics and Physics Journals

Jim Willison

mathematics_physics@omicsinc.com

1-702-714-7001 Extn: 9042

Medical Journals

Nimmi Anna

medical@omicsinc.com

1-702-714-7001 Extn: 9038

Neuroscience & Psychology Journals

Nathan T

neuro_psychology@omicsinc.com

1-702-714-7001Extn: 9041

Pharmaceutical Sciences Journals

John Behannon

pharma@omicsinc.com

1-702-714-7001Extn: 9007

Social & Political Science Journals

Steve Harry

social_politicalsci@omicsinc.com

1-702-714-7001 Extn: 9042

 
© 2008-2016 OMICS International - Open Access Publisher. Best viewed in Mozilla Firefox | Google Chrome | Above IE 7.0 version