The effect of investor-driven information diffusion on excess comovement: Evidence from retail and institutional investors in China and the United States

TL;DR

This paper examines how retail and institutional investors' information diffusion affects excess stock comovement in China and the U.S., revealing market-specific dominant influences and predictive patterns.

Contribution

It provides a comparative analysis of investor-driven information diffusion's impact on excess comovement across two major markets, highlighting the differing roles of retail and institutional investors.

Findings

Retail-driven diffusion has a stronger effect in China.

Institution-driven diffusion dominates in the U.S.

Faster diffusion leads to earlier comovement signals.

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.