Investor attention and market microstructure

This paper develops the first economic model to study the impact of investor attention on the market microstructure in the Kyle's (1985) setup. Our model strongly supports the empirical observation that higher investor attention leads to higher stock market volatility. The first special case with one fully and one limited attentive traders explains that higher attention leads to higher trading intensity of retail investors, market liquidity and stock market volatility. The second special case with one fully inattentive and one limited attentive traders explains how investor attention affects buying and selling. (C) 2016 Elsevier B.V. All rights reserved.