Publication Type

Working Paper

Version

publishedVersion

Publication Date

12-2023

Abstract

Studies on commonality generally attribute the variation in asset returns to the variation in order flows. In this research study, we show that order flows do not predict asset returns, rather their relationship have been static over time. Thus we model both returns and the order flows as endogenous variables, and use investors' sentiment and attention as exogenous factors via a reduced-rank regression. We provide empirical evidence to demonstrate that cross-sectional commonality in attention (sentiment) is linearly (nonlinearly) associated with both returns and order flows at the intraday level, while the sentiment and attention measures themselvesexhibit a nonlinear mutual relationship, thus revealing the multi-dimensional complex aspect of the commonality relationship. The persistence of this relationship over a decade is documented using a largesample of assets. The concept of commonality is also related to portfolio optimization.

Keywords

commonality, return and order flow measures, co-movement, market sentiment, investor attention, principal component analyses, canonical correlation analyses, reduced rank regression, quantitative trading strategies

Discipline

Corporate Finance | Finance | Finance and Financial Management

Research Areas

Quantitative Finance

First Page

1

Last Page

52

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