Sentiment order imbalance and co-movement: An examination of shocks to retail and institutional trading activity

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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 languageEnglish
Pages (from-to)1-44
JournalEuropean Financial Management
Early online date17 Sep 2017
DOIs
Publication statusPublished - 30 Sep 2017

Keywords

  • trading
  • buy-sell ratio
  • smooth transition
  • co-movement
  • order flow shock and sentiment
  • smooth transition model

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