ABSTRACT
In this paper we study the impact of noise tradersâ limited attention on financial markets. Specifically we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on âdistraction days,â trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.
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