Why commonality persists?

• Main Authors: TEE, Chyng Wen, VELU, Raja, ZHOU, Zhaoque
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: commonality; return and order flow measures; co-movement; market sentiment; investor attention; principal component analyses; canonical correlation analyses; reduced rank regression; quantitative trading strategies.; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7096; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8095/viewcontent/Why_Commonality_Persists.pdf
• Institution: Singapore Management University

We show that order flows do not exhibit predictive power on asset returns, and their relationships have been static over time. We use a reduced-rank regression formulation to model both returns and the order flows as endogenous variables, and use investors' sentiment and attention as exogenous factors. We provide empiricalevidence 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 attentionmeasures themselves exhibit a nonlinear mutual relationship, thus revealing the multi-dimensional aspect of the commonality relationship.