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Keeping Your Eye On The Football Increases Correlation

"Drawing on rational attention theory, I derive and test how fluctuations in attention affect the stock market. When attention is scarce, investors prioritize market news over firm-specific news, as the former contribute more to portfolio uncertainty than the latter. As a result, stock prices incorporate less firm-specific news and returns move more synchronously. I test this idea using Google searches on sports in 36 countries to proxy for exogenous changes in investors' attention. I first confirm that trading weakens when sport searches intensify. I then report that returns are less dispersed and more synchronous when investors pay more attention to sports. I rule out alternative explanations based on sentiment, reverse causality or news supply. My results provide strong support for the notion that investors allocate their attention in a rational manner." - Daniel Schmidt, INSEAD