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Which kind of investor causes comovement?

Jie Li,Yongjie Zhang,Xu Feng,Yahui An

Published 2019 in Journal of international financial markets, institutions, and money

ABSTRACT

In this study, we examine whether the trading behavior of different types of investors (individual investors, funds, qualified foreign institutional investors, insurance, and state-owned companies) generate different effects on excess return comovement. The empirical results show that only funds’ behavior forecasts more variation in excess return correlation, controlling for the other three types of factors (macroeconomic, stock characteristics, and information diffusion). Moreover, we provide adequate evidence that the comovement arising from funds’ trading behavior is due to their specific purchase and redemption mechanism, rather than holding more or trading more. Finally, an additional test is conducted to confirm that purchases cause more comovement than redemptions do, which might be related to larger amount of purchases.

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