Paper: arXiv 2605.08726

Authors: Fei Ren, Miao-Miao Yi, Zhang-Hangjian Chen, Xiang Gao

Abstract

This study investigates how cross-stock information diffusion, driven by both retail and institutional investors, influences excess comovement in the Chinese retail-dominated market and the U.S. institution-dominated market. Using data from 4,533 Chinese stocks and 4,517 U.S. stocks from 2010 to 2022, we identify three key findings. First, the dominant investor group in each market significantly drives excess comovement. Specifically, in China, compared with institution-driven diffusion, retail-driven information diffusion has a notably stronger effect on excess comovement. In contrast, in the U.S., institution-driven diffusion is the primary driver of excess comovement, surpassing the influence of retail-driven diffusion. Second, we identify investors’ trading behavior as the underlying mechanism through which information diffusion affects excess comovement. Third, we observe a lead-lag relationship: stocks with faster retail-driven information diffusion exhibit comovement that precedes those with slower diffusion. Based on this finding, we further demonstrate that the predictive power of information diffusion varies across markets. In China, retail-driven diffusion shows strong and persistent predictability for excess comovement, whereas in the U.S., institution-driven diffusion exhibits similarly robust predictive capacity.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a strong empirical analysis comparing the Chinese and U.S. markets across a large dataset (over 9,000 stocks total) over a 12-year period. While the mathematical formulations are straightforward econometric models rather than complex quantitative finance derivations, the cross-market insights into retail vs. institutional drivers of excess comovement are novel and well-supported.

Research Flowchart

  flowchart TD
    A[Research Goal: Examine investor-driven information diffusion & excess comovement in CN vs. US] --> B[Data Input: 4,533 Chinese & 4,517 US stocks 2010–2022]
    B --> C[Methodology: Quantify retail vs. institutional information diffusion & trading behavior]
    C --> D[Computational Analysis: Model lead-lag relationships & cross-market predictive power]
    D --> E1[Finding 1: Excess comovement is driven by market-dominant investors CN: Retail | US: Institutional]
    D --> E2[Finding 2: Investor trading behavior is the key underlying mechanism]
    D --> E3[Finding 3: Stocks with faster information diffusion lead slower ones, enabling strong market predictions]