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

2026-05-09

AI Summary

This study investigates how cross-stock information diffusion driven by retail and institutional investors affects excess comovement in the Chinese and U.S. equity markets. Leveraging a large sample of over 9,000 stocks from both markets between 2010 and 2022, the analysis combines empirical modeling, a tailored information diffusion metric, and lead–lag time-series tests to uncover heterogeneous effects of investor types under distinct market structures. The findings reveal that in China, retail-driven information diffusion exerts a stronger and more persistent predictive power on excess comovement, whereas in the U.S., institution-driven diffusion dominates and demonstrates robust forecasting ability. These results underscore the critical role of market microstructure in shaping information transmission mechanisms across equity markets.

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.

Problem

• information diffusion
• excess comovement
• retail investors
• institutional investors
• cross-market comparison

Innovation

• information diffusion
• excess comovement
• retail investors
• institutional investors
• lead-lag relationship