Abstract
This paper presents convincing empirical evidence that style investing, the practice of allocating funds among styles rather than individual assets, generates comovement among stocks with similar book-to-market ratios. Data on constituents of the S&P/Barra Value and Growth indices are used to conduct empirical tests that lead to five main results. (1) When a stock switches from one index to the other, the correlation, beta, and conditional beta with the new index increase. (2) Cross-sectionally, there is evidence of a discontinuity in comovement at the book-to-market cutoff that defines the two indices. (3) The value and growth definitions of S&P/Barra are a significant determinant of what value and growth style funds hold in their portfolios. (4) None of these empirical patterns exist among the universe of stocks that would have been in the indices from 1981 to 1991. The indices did not exist before 1992. In summary, the evidence of this paper suggests comovement among stocks with similar book-to-market ratios can be generated by trading behaviors such as style investing that are not related to the systematic risk of earnings.
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