Comovement

38 Pages Posted: 3 Nov 2008

See all articles by Nicholas Barberis

Nicholas Barberis

National Bureau of Economic Research (NBER); Yale School of Management

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Je rey Wurgler

affiliation not provided to SSRN

Multiple version iconThere are 5 versions of this paper

Date Written: November 2001

Abstract

A number of studies have identified patterns of positive correlation of returns, orcomovement, among different traded securities. We distinguish three views of such comovement. The traditional \fundamentals" view explains the comovement of securities through positive correlations in the rational determinants of their values, such as cash flows or discount rates. \Category-based" comovement occurs when investors classify different securities into the same asset class and shift resources in and out of this class in correlated ways. A related phenomenon of \habitat-based" comovement arises when a group of investors restricts its trading to a given set of securities, and moves in and out of that set in tandem. We present models of each of the three types of comovement, and then assess them empirically using data on stock inclusions into and deletions from the S&P 500 index.Index changes are noteworthy because they change a stock's category and investorclientele (habitat), but do not change its fundamentals. We find that when a stock isadded to the index, its beta and R-squared with respect to the index increase, while itsbeta with respect to stocks outside the index falls. The converse happens when a stockis deleted. These results are broadly supportive of the category and habitat views of comovement, but not of the fundamentals view. More generally, we argue that thesenon-traditional views may help explain other instances of comovement in the data.

Suggested Citation

Barberis, Nicholas and Barberis, Nicholas and Shleifer, Andrei and Wurgler, Je rey, Comovement (November 2001). NYU Working Paper No. FIN-01-064, Available at SSRN: https://ssrn.com/abstract=1294609

Nicholas Barberis (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Je rey Wurgler

affiliation not provided to SSRN

No Address Available

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
134
Abstract Views
1,454
Rank
11,418
PlumX Metrics