Style Investing and Comovement of Trading Volume

Abstract

Barberis and Shleifer (2003) model an economy in which some investors engage in positive feedback style investing. These investors group stocks into styles, and then form demands for stocks at style level, instead of at individual stock level. In this paper, the implications of style investing on comovement of trading volume are studied. Stocks are classified into nine styles based on their market cap and book-to-market ratio. We find that stock trading activities tend to comove within styles. Stocks in large market cap styles tend to demonstrate stronger degree of trading activity comovements than stocks in smaller market cap styles. This is consistent with the notion that stocks in large market cap styles tend to belong to major indexes like S&P 500 or Dow Jones 30, and therefore tend to attract more large passive index investors. We also find that the extent to which stock trading activities comove within a style increases with the style's previous year relative return performance. This relation is only statistically significant for medium and small market cap styles. Once again, this could be due to the fact that large market cap stocks are more likely to belong to major indexes. Since investing in these indexes is such a popular investment strategy, it is unlikely that one year of bad return can significantly shake up an investor's faith in investing in these indexes. Our third result is that, when a stock changes its style, its trading activities comove less with stocks in the old style, and comove more with stocks in the new style. All the above results are consistent with the positive-feedback style investing model. Our results cannot be explained by liquidity comovements.