Abstract
Using order flow imbalance as a measure of sentiment we show that positive and negative shocks to sentiment captured by the Smooth Transition Conditional Correlation GARCH model (STCC GARCH model) lead to lower co-movement between portfolio and market returns in the post-shock period. We find an asymmetry is present as positive shocks to sentiment have less impact on co-movement changes than negative shocks. We also find that shocks to retail sentiment and the sentiment of two types of institutional investors leads to a reduction in co-movement. Positive shocks to institutional order flow imbalance lead to smaller reductions in co-movement than associated with retail shocks. These effects exist even after we control for firm specific and market-wide news.
Original language | English |
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Pages (from-to) | 1-44 |
Journal | European Financial Management |
Early online date | 17 Sept 2017 |
DOIs | |
Publication status | Published - 30 Sept 2017 |
Keywords
- trading
- buy-sell ratio
- smooth transition
- co-movement
- order flow shock and sentiment
- smooth transition model