Sentiment, Order Imbalance, and Co‐Movement: An Examination of Shocks to Retail and Institutional Trading Activity

44 Pages Posted: 30 Jan 2019

See all articles by Patricia Chelley-steeley

Patricia Chelley-steeley

University of Birmingham

Neophytos Lambertides

Cyprus University of Technology

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: January 2019

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.

Keywords: co‐movement, order flow shock and sentiment, smooth transition model

Suggested Citation

Chelley-steeley, Patricia and Lambertides, Neophytos and Savva, Christos S., Sentiment, Order Imbalance, and Co‐Movement: An Examination of Shocks to Retail and Institutional Trading Activity (January 2019). European Financial Management, Vol. 25, Issue 1, pp. 116-159, 2019. Available at SSRN: https://ssrn.com/abstract=3326048 or http://dx.doi.org/10.1111/eufm.12146

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

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