Sentiment, order imbalance, and co‐movement: An examination of shocks to retail and institutional trading activity

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.