Sentiment, order imbalance, and co-movement: An examination of shocks to retail and institutional trading activity
Journal
European Financial Management
Date Issued
January 2019
DOI
10.1111/eufm.12146
Abstract
Using order flow imbalance as a measure of sentiment we show that positive and negative shocks to sentiment lead to lower co-movement between portfolio and market returns in the post-shock period. Furthermore, an asymmetry is present as positive shocks to sentiment have less impact on co-movement changes than negative shocks. Moreover, shocks to retail sentiment and the sentiment of two types of institutional investors lead 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 controlling for firm-specific and market-wide news.