Changes In Comovement Research Articles

A Century of Global Equity Market Correlations

In this paper, we use a unique long-run dataset of regulatory constraints on capital account openness to explain stock market correlations. Since stock returns themselves are highly volatile, any examination of what drives correlations needs to focus on long runs of data. This is particularly true since some of the short-term changes in co-movements appear to reverse themselves (Delroy Hunter 2005). We argue that changes in the co-movement of indices have not been random. Rather, they are mainly driven by greater freedom to move funds from one country to another. In related work, Geert Bekaert and Campbell Harvey (2000) show that equity correlations increase after liberalization of capital markets, using a number of case studies from emerging countries. We examine this pattern systematically for the last century, and find it to be most pronounced in the recent past. We compare the importance of capital account openness with one main alternative explanation, the growing synchronization of economic fundamentals. We conclude that greater openness has been the single most important cause of growing correlations during the last quarter of a century, though increasingly correlated economic fundamentals also matter. In the conclusion, we offer some thoughts on why the effects of greater openness appear to be so much stronger today than they were during the last era of globalization before 1914.(This abstract was borrowed from another version of this item.)

Comovement in the FTSE 100 Index

This article extends recent research (Barberis et al., 2005 Barberis, N, Shleifer, A and Wurgler, J. 2005. Comovement. Journal of Financial Economics, 75: 283–317. [Crossref], [Web of Science ®] , [Google Scholar]) on the impact of index changes on stock comovement. Stocks that are added to the FTSE 100 comove more closely with the FTSE 100, whilst the reverse is found in stocks deleted from the FTSE 100. Consistent with previous research, these changes appear to have become larger over more recent years. As a result of the method by which changes are made to the FTSE 100, this article is able to distinguish between additions that are new firms and additions that have previously been constituents. There is a significant difference between these two sets of firms, both in terms of the change in comovement and the extent of their comovement after addition to the FTSE 100. Specifically, it is the change in comovement among firms that are new to the FTSE 100 that drives much of the overall increase in comovement among additions. This result implies that the change in comovement cannot be explained solely by the behavioural finance view of comovement and the associated impact of category or habitat traders.

Comovement and Return Predictability

In this paper, we investigate whether comovement can generate predictability in returns. Barberis and Shleifer (2003) argue that style investing causes comovement of stocks within a style to be larger than that warranted by fundamentals. This naturally suggests that comovement may measure investor sentiment, a construct that both academics and practitioners would like to measure with precision. The former are interested in measuring sentiment for scientific reasons and the latter for mercenary ones. Unfortunately, instruments to measure sentiment are either sparse or of poor quality (Baker and Wurgler (2007)). But since our interest is not in aggregate sentiment but comovement with respect to a particular style, we can use an extraordinarily simple and yet precise measure: the R2 of a regression of the stock on the returns of style it belongs to. We measure comovement with respect to size and book-to-market based portfolios because of their ubiquitous role in both retail and institutional portfolio management. We find that between 1970 and 2006, a long-short portfolio strategy based on low and high comovement stocks generates gross returns of 0.9% per month for up to 3 months and 0.7% per month up to 12 months. The excess returns (alpha) after controlling for size, book-to-market and momentum effects are up to 0.86% per month. Although comovement is correlated with trading volume, our results withstand the incorporation of volume in to the trading strategy (Lee and Swaminathan (2000)). As we complete our analysis over the next few months, we expect to (a) use an alternative measure of comovement, (b) examine measures of investment style beyond the traditional size and value-growth grid, (c) examine time variation in excess returns, and (d) determine if changes in comovement can explain the reversal in returns over long-horizons (DeBondt and Thaler (1985)).

Breaks in the Variability and Comovement of G-7 Economic Growth

This paper investigates breaks in the variability and comovement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on comovement, we test for changes in comovement, allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the euro-area members of the G-7.

Breaks in the Variability and Co-Movement of G-7 Economic Growth

This paper investigates breaks in the variability and comovement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on comovement, we test for changes in comovement, allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the euro-area members of the G-7.

Breaks in the Variability and Co-Movement of G-7 Economic Growth

This paper investigates breaks in the variability and co-movement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on co-movement, we test for changes in co-movement allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the members of the euro area in the G-7.

Trade and the Comovement of Stock Returns: Evidence from Japan

In April 2000, in one day, 30 stocks were replaced in the Nikkei 225 index in Japan. We analyze the change in comovement of returns of stocks added to and deleted from the index with the returns of stocks remaining in the index. A simple model shows that upon inclusion into (deletion from) a stock index, stocks should begin to comove more (less) with the index, due to a change in their trading pattern. The empirical findings provide sound support for these predictions: In the sample, daily index betas of the added stocks rose by an average of 0.60, while the average beta of the deleted stocks fell by 0.71. Our results confirm additional predictions of the model for changes in R2, turnover, and the autocorrelation of returns upon index inclusion and deletion, and hold at daily, weekly and bi-weekly return horizons. Fundamentals based explanations fail to account for these findings. We conclude that correlated trading of index stocks causes excess comovement of stock returns. We argue that the distinct trading mechanism on the Tokyo Stock Exchange contributes to the significance and magnitude of our results.