Tradin’ in the Rain: Attention Allocation and Investment Performance

We propose a multi-asset model to study how attention allocation affects investment performance. Our model predicts that when investors allocate more attention to the stock market, they have better investment performance. This attention effect is stronger among high-beta stocks. Using rainy days as exogenous attention shocks and a nationwide trading dataset at the brokerage-branch level, we first show that retail investors pay more attention to the stock market on rainy days. Consistent with the model predictions, we find that retail investors have better trading performance on rainy days, especially for high-beta stocks. We also find lower return co-movement and stronger market reactions to earnings announcements on rainy days.