Identifying the Effects of Macroeconomic Attention Through Foreign Investor Distraction

Paul Marmora

While the causal impact of limited attention to macroeconomic news is difficult to detect, this paper proposes one solution: exploiting when foreign investors are “distracted” by risk factors in their home markets. I demonstrate that financial activity in the average foreign investor’s home market decreases foreign attention paid to 21 emerging economies, measured using Google search volume for economy-specific financial terms that emanate from outside each economy’s border. Exploiting this effect using an instrumental variables approach, I find that an exogenous increase in foreign attention preceding a scheduled monetary policy rate announcement raises preannouncement stock returns and announcement day turnover.