Retail Investors’ Trading Activity and the Predictability of Stock Return Correlations
44 Pages Posted: 13 Oct 2020 Last revised: 27 Aug 2021
Date Written: August 27, 2021
Considerable theoretical and empirical evidence links price comovements with the behavior of retail investors. Nevertheless, when predicting stock return correlations, research has focused on the leverage effect. We propose a new model of realized covariances that allows exogenous predictors to influence the correlation dynamics while ensuring the predicted matrices' positive definiteness. Using this model, we provide evidence for the predictive power of sentiment and attention measures obtained from social media and web-search query data for the correlations of 35 Dow Jones stocks. At the one-day forecasting horizon, these findings are confirmed by value-at-risk forecasts.
Keywords: realized correlation, realized covariance, retail investors, investor sentiment, investor attention
JEL Classification: C22, C51, C53, G17, G40
Suggested Citation: Suggested Citation