How commonality persists? (Through investors' sentiment and attention)

• Main Authors: TEE, Chyng Wen, VELU, Raja, ZHOU, Zhaoque
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• 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; Corporate Finance; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7361; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8360/viewcontent/How_Commonality_Persists_through_Investors_Sentiment_and_Attention.pdf
• Institution: Singapore Management University

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.