A Cross Sectional Analysis of the Excess Comovement of Stock Returns

A Cross Sectional Analysis of the Excess Comovement of Stock Returns
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Total Pages : 46
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ISBN-10 : OCLC:60127879
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Book Synopsis A Cross Sectional Analysis of the Excess Comovement of Stock Returns by : Robin Marc Greenwood

Download or read book A Cross Sectional Analysis of the Excess Comovement of Stock Returns written by Robin Marc Greenwood and published by . This book was released on 2005 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the presence of limits to arbitrage, cross-sectional variation in periodic investor demand should be related to the degree of comovement of returns. I exploit the unusual weighting system of the Nikkei 225 index in Japan to identify cross-sectional variation in periodic demand for index stocks. Relative to their weights in a value weighted index, some stocks in the Nikkei are overweighted by a factor of ten or more. Using overweighting as an instrument for the proportionality between demand shocks for index stocks, I find a strong positive relation between overweighting and the comovement of a stock with other stocks in the index, and a negative relationship between index overweighting and comovement with stocks outside of the index. Put simply, overweighted stocks have high betas. The results suggest that excess comovement of stock returns is a consequence of an institutionalized commonality in trading behavior, rather than inefficiencies related to the speed at which index stocks incorporate economy-wide information.


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