A Cross Sectional Analysis of the Excess Comovement of Stock Returns
Author | : Robin Marc Greenwood |
Publisher | : |
Total Pages | : 46 |
Release | : 2005 |
ISBN-10 | : OCLC:60127879 |
ISBN-13 | : |
Rating | : 4/5 (79 Downloads) |
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.