Retail investors’ attention and momentum strategies

Relying on Google Trends search data for the S&P 500 stocks between 2004 and 2015, we find that investing in momentum in a portfolio of stocks with increasing search activity minus a portfolio of stocks facing a decreasing search activity does not exhibit, ceteris paribus, significant positive momentum returns. Furthermore, we show that retail investors’ attention creates volatility. For that reason, investing in stocks with stable retail investors’ attention decreases significantly momentum volatility. The momentum effect has a negative relationship with the market tone and does not significantly impact the long-term reversal effect. For those reasons, while general investors overreact to information as shown by Hillert et al. (2014), we conclude that retail investors underreact to information.