The thesis consists of two essays on behavioral finance. The first essay is titled, "Attention and Trading." This study empirically explores the effects of attention levels on investors' trading behavior and on market price dynamics. Specifically, we analyze the ability of market-wide attention-grabbing events--record-breaking events of the Dow index and front page articles about the stock market--to, predict the trading behavior of investors and market returns. The empirical results show that the impact of attention is pervasive across the market. High attention causes individual investors to reduce their stock holdings dramatically when the market level is high and to increase their stock holdings modestly when the market level is low. The aggressive selling by individual investors induces institutional investors to trade and has a negative impact on market prices, reducing market returns by 19 basis points on days following attention-grabbing events. The second essay is titled, "Investor Sentiment and the Mean-Variance Relation," with Jianfeng Yu. This study documents the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with the presence of sentiment traders who, during high sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation in such periods.
