Asymmetric attention and volatility asymmetry

Abstract

Analyzing a large sample of U.S. firms, we show that the asymmetry of stock return volatility is positively related to investor attention and differences of opinion.Using the number of analysts following a given firm to capture attention and the dispersion in analyst forecasts as a common proxy for differences of opinion, we show that the two effects are complementary. Furthermore, the effect of attention is strongest among stocks with low institutional ownership and high idiosyncratic volatility. Our results are robust to the traditional "leverage effect" explanation of volatility asymmetry. The findings relate to the previously documented relationship between attention and volatility and suggest that volatility asymmetry is driven by asymmetric attention.JEL classification: G11,G12,G14.

Firm-level political risk and asymmetric volatility

“…Considering the conclusion by Soroka (2006) that such an asymmetry in the public's response to economic information is in part driven by asymmetries evident in media content, resulting in mass media overemphasizing negative information, one can argue that investors' greater attention to negative information regarding political risk exposures drives the asymmetric effect that we observe in our tests. This explanation is in fact supported by the recent finding by Dzieliński et al (2018) that volatility asymmetry is driven by asymmetric attention such that investor attention and differences of opinion drives the asymmetry in stock return volatility. Given the conclusion by Hassan et al (2017) that political shocks serve as a significant driver of firm-level (idiosyncratic) risk and by Dzieliński et al (2018) that stocks for which volatility is largely idiosyncratic also show a larger volatility asymmetry, our finding suggest that the effect of political risk exposure on asymmetric volatility can be explained by investor attention to economic news.…”

“…This explanation is in fact supported by the recent finding by Dzieliński et al (2018) that volatility asymmetry is driven by asymmetric attention such that investor attention and differences of opinion drives the asymmetry in stock return volatility. Given the conclusion by Hassan et al (2017) that political shocks serve as a significant driver of firm-level (idiosyncratic) risk and by Dzieliński et al (2018) that stocks for which volatility is largely idiosyncratic also show a larger volatility asymmetry, our finding suggest that the effect of political risk exposure on asymmetric volatility can be explained by investor attention to economic news.…”

“…Campbell and Hentschel, 1992;Bekaert and Wu, 2000). More recently, however, building on the evidence by Andrei and Hasler (2015) that investor attention is related to volatility, Dzieliński et al (2018) argue that volatility asymmetry is largely driven by asymmetries in investor attention channelled by the differences in opinion and dispersion in forecasts. Motivated by a growing number of studies on the effect of economic policy uncertainty (EPU) on stock market volatility (e.g.…”

“…They then show that this proxy of political risk is able to predict quarterly (implied and realized) U.S. firm-level volatility in a panel of 9,481 firms. While Hassan et al (2017) relate the effect of political risk on volatility to market frictions and inefficiencies that hinder growth at the firm level, the recent evidence by Andrei and Hasler (2015) and Dzieliński et al (2018) create an interesting opening suggesting that investor attention and dispersion of forecasts by analysts may also play a role in how political risk exposure relates to volatility.…”

Contagion Effect of Natural Disaster and Financial Crisis Events on International Stock Markets

“…They suggest that gross domestic product capita, stock market participation, and analyst coverage are factors that increase asymmetric volatility. Dzieliński et al (2018) analyze the asymmetric volatility of stock returns in US firms, and find that stocks that receive more attention from analysts and stocks with low institutional ownership show considerable asymmetric volatility. However, these studies only investigated asymmetric volatility; they did not discuss the contagion effect, which is an important factor in the transmission of market changes.…”