The effect of security and market order flow shocks on co-movement

Patricia Chelley-steeley, Neophytos Lambertides, Christos S. Savva

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)
206 Downloads (Pure)

Abstract

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.
Original languageEnglish
Pages (from-to)p136-155
JournalJournal of International Financial Markets, Institutions and Money
Volume39
Early online date26 Jul 2015
DOIs
Publication statusPublished - 2016

Keywords

  • Co-movement
  • Order flow shock
  • Smooth transition model

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