Common Asset Holdings and Stock Return Comovement

Abstract

A growing literature highlights the effect of common asset holdings on market dynamics. Focusing on relatively large stocks, Anton and Polk (2014) find that assets with many common investors comove more strongly in the future than otherwise similar stocks. In order to acknowledge the shift in institutional preferences over the last two decades we perform a similar analysis but also include small stocks in our sample. Our main findings are as follows: first, we document a strong increase in both institutional ownership and common asset holdings over the sample period, particularly so for the smallest stocks. Second, raw stock return correlations have also increased strongly over time, while the increase is much more modest for factor model residual correlations. Third, we confirm that common ownership is significantly related to future return correlations for relatively large stocks, but the relationship appears to become less important over time. For relatively small stocks the relationship is often insignificant, but the effect appears to become more important over time. Lastly, we find no evidence that institutional ownership Granger-causes return correlations for the subset of small stocks.