Recently, Assistant Professor Xin Chen from our institute published a paper titled Attention Spillover in Asset Pricing in the internationally renowned financial journal Journal of Finance. This journal, founded by the American Finance Association, is also one of the 24 academic journals (known as UTD24) selected by the University of Texas at Dallas for evaluating the research capabilities of international business schools. The publication of this paper significantly enhances the academic influence of our school in the fields of finance and related disciplines and is an essential reflection of our high-quality research achievements and high-level discipline development.

Paper Overview: Limited attention and overconfidence are two widely studied characteristics in investor behaviour, attracting scholars worldwide who have constructed numerous theoretical models to explain various market phenomena. Previous literature usually examines the effects of a single behavioural characteristic and does not consider their potential interactions, mainly due to the substantial identification challenges involved. Even when studying overconfidence or limited attention in isolation, it is difficult to identify their pricing effects, as variables affecting both are often also correlated with the fundamental aspects of a company. Thus, recognizing the potential interaction between the two poses even more significant challenges. This paper employs a novel identification strategy to study the causal impact of the interaction between overconfidence and limited attention on equilibrium prices and trading volume. Specifically, the paper suggests that the classical overconfidence theory posits that investors who have experienced high returns tend to attribute this outcome to their skills, becoming overconfident and increasing subsequent trading. Meanwhile, the limited attention theory suggests that investors cannot consider all stocks in the market comprehensively and can only focus on a limited number of stocks.

Combining the two behavioural theories, the paper raises an interesting question: After earning profits, do investors become more aggressive in trading the stocks they can focus on? The paper uses an exogenous setting based on trading software’s browsing interface to conduct causal identification. The research finds that investors are more actively trading stocks adjacent to their existing holdings after making profits, which influences market pricing. By constructing predictive indicators using the past returns of neighbouring stocks on the browsing interface, the paper finds that these indicators can predict the future returns of stocks. The corresponding strategy can generate economically significant annualized returns. Further analysis reveals that the interaction between overconfidence and limited attention is the key mechanism that produces the pricing effects, while a single behavioural characteristic cannot lead to the priming effects observed in the paper. (Paper Link: https://onlinelibrary.wiley.com/doi/full/1o.1111/iofi.13281）