Investor Attention to Individual Stocks Can Reveal Where the Market Is Headed Next
Understanding how investors behave has always been a key part of understanding how financial markets move. A new study from the University of Notre Dame adds an important piece to that puzzle by showing that where investors focus their attention — and who those investors are — can help predict short-term stock market performance. The research suggests that not all attention is equal, and in fact, attention from different types of investors can signal opposite outcomes for the broader market.
Why Investor Attention Matters
Before any trade happens, an investor has to notice a stock. This simple idea is at the heart of the research. Investors cannot buy or sell what they are not paying attention to, and trading activity is ultimately what pushes stock prices up or down. Over the past several years, academic research has increasingly shown that investor attention influences stock prices, learning behavior, and trading decisions.
What makes this new study stand out is its focus on marketwide effects, rather than just individual stocks. Instead of asking how attention affects one company at a time, the researchers examined whether aggregated attention across thousands of stocks could tell us something meaningful about the future direction of the overall market.
Retail and Institutional Investors Do Not Behave the Same Way
One of the most important findings of the study is the clear divide between retail investors and institutional investors.
Retail investors are everyday individuals who trade on their own accounts. Institutional investors include professional entities such as mutual funds, hedge funds, pension funds, and asset managers. While both groups participate in the same markets, they behave very differently when it comes to attention and timing.
The research shows that when retail investor attention spikes, the stock market tends to deliver lower returns over the following week. In contrast, when institutional investor attention increases, the market is more likely to experience higher short-term returns, especially around periods when major news is expected.
This contrast highlights that attention is not just about volume or popularity — it is also about information quality and timing.
How the Researchers Measured Attention
To study investor attention in a precise way, the research team relied on large-scale, real-world data sources that reflect what different investors are actually looking at.
Retail investor attention was measured using Google’s daily Search Volume Index. When more people search for specific stock tickers online, it signals heightened interest from individual investors who often rely on public search engines for information.
Institutional investor attention, on the other hand, was captured using Bloomberg’s Daily Maximum Readership (DMR) score. This metric tracks how often professional investors using Bloomberg terminals read news related to a particular stock. Because Bloomberg terminals are primarily used by financial professionals, this measure serves as a strong proxy for institutional interest.
Rather than analyzing each stock separately, the researchers calculated abnormal attention for each stock and then averaged those values across the entire market. This approach allowed them to construct two daily market-level indicators:
- Aggregate Retail Attention (ARA)
- Aggregate Institutional Attention (AIA)
These two indicators were then tested to see whether they could predict future market returns.
What the Results Showed
The results were striking and consistent.
When Aggregate Retail Attention rises sharply, market returns over the next week tend to decline. This pattern suggests that retail investors often pay attention after prices have already risen, contributing to temporary overvaluation. As excitement fades and prices adjust, returns fall.
This phenomenon is closely related to attention-driven buying and herding behavior, where individual investors chase popular stocks without fully accounting for valuation or risk.
In contrast, Aggregate Institutional Attention predicts higher future returns. Institutional investors tend to increase their research activity before major information events, such as earnings announcements or macroeconomic releases. Their attention often reflects upcoming uncertainty, which leads markets to demand higher expected returns during these periods.
In simple terms, retail attention tends to arrive late, while institutional attention tends to arrive early.
Why Market-Level Attention Works Better Than Broad Searches
Another important finding of the study is that top-down attention measures do not work nearly as well. Searching for broad terms like “Dow,” “S&P 500,” or “stock market” does not reliably predict returns.
The reason is straightforward: the market is not a single entity. It is the sum of thousands of individual stocks, each responding to its own set of information and investor behaviors. By measuring attention at the stock level and then aggregating it, the researchers created a bottom-up view of market sentiment that captures far more detail and nuance.
This approach proved to be much more effective in forecasting short-term market movements.
Broader Implications for Investors and Researchers
The findings have several important implications.
For investors, the study suggests that who is paying attention matters more than how much attention exists overall. Spikes in retail buzz may serve as warning signs of overheating, while rising institutional interest could point to upcoming opportunities or higher expected returns.
For academics and market analysts, the research strengthens the case for attention-based factors as legitimate tools for understanding asset pricing. It also shows the importance of separating investor types, rather than treating all attention as a single force.
From a practical standpoint, better predictors of short-term market movements can help investors make more informed allocation and risk management decisions.
Additional Context: Attention and Modern Financial Markets
In today’s digital environment, attention has become easier to measure and more powerful than ever. Search engines, financial news platforms, and social media all leave data trails that reveal what investors are thinking about in real time. This has opened the door for a new generation of financial research focused on behavioral signals, rather than just traditional fundamentals.
However, attention alone does not guarantee profits. The study makes it clear that attention can be misleading, particularly when it comes from less-informed participants reacting to past price movements rather than future information.
The key takeaway is not that attention should be followed blindly, but that understanding the source and timing of attention can provide valuable insight into market dynamics.
Final Thoughts
This research from the University of Notre Dame shows that investor attention is far more than background noise. When measured carefully and interpreted correctly, it can offer meaningful clues about where the market is headed — at least in the short run. The sharp contrast between retail and institutional behavior serves as a reminder that markets are shaped not just by information, but by who processes that information, and when.
As data becomes more detailed and investor behavior more transparent, attention-based research is likely to play an even bigger role in how we understand financial markets.
Research paper:
https://pubsonline.informs.org/doi/10.1287/mnsc.2023.01294
