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

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  • Chelley-Steeley, Patricia
  • Lambertides, Neophytos
  • Savva, Christos S.

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.

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  • Chelley-Steeley, Patricia & Lambertides, Neophytos & Savva, Christos S., 2015. "The effect of security and market order flow shocks on co-movement," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 136-155.
    • Handle: RePEc:eee:intfin:v:39:y:2015:i:c:p:136-155
    DOI: 10.1016/j.intfin.2015.07.005
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    More about this item

    Keywords

    Order flow shock; Co-movement; Smooth transition model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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