In this paper, we apply the smooth transition conditional correlation model to examine the impact that shocks to order flow imbalance have on stock market co-movement. We show that positive and negative shocks to security order flow reduce co-movement. Market order flow shocks have only a small impact on post shock correlations. Our results suggest that investors can increase diversification opportunities when forming dynamic portfolio strategies if they take account of security order flow information. We show that pre-shock firm characteristics allow investors to identify those stocks with the greatest diversification benefits.
|Journal||Journal of International Financial Markets, Institutions and Money|
|Early online date||26 Jul 2015|
|Publication status||Published - 2016|
- Order flow shock
- Smooth transition model