Return Comovement Research Articles

Co-Movement Segmentation: Inter- and Intra-Industry Return Co-Movement

The literature has shown a substantial relation between stock return co-movement and macroeconomic variables. Our results contribute to the research by separating the stock return co-movement into intra- and inter-industry return co-movement and found that the predictive power comes mainly from the inter-industry return co-movement. We found that there is a significant positive causality running from inter-industry co-movement to GDP and money supply, and from intra-industry co-movement to CPI and money supply.

Financial crises, price discovery, and information transmission: a high-frequency perspective

This paper examines the price discovery processes before and during the 2007–2009 subprime and financial crisis, as well as the subsequent European sovereign crisis, for American and German stock and bond markets, as well as for U.S. Dollar/Euro FX. Based on 5-s intervals, we analyze how asset prices interact conditional on macroeconomic announcements from the USA and Germany. Our results show significant co-movement and spillover effects in returns and volatility, reflecting systematic information transmission mechanisms among asset markets. We document strong state dependence with a substantial increase in inter-asset spillovers and feedback effects during times of crisis.

Attention allocation and return co-movement: Evidence from repeated natural experiments

We hypothesize that when investors pay less attention to financial markets, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.

Global risk aversion and emerging market return comovements

Utilizing the recently developed measure of global risk aversion by Xu (2017), we show that global risk aversion is a significant determinant of international equity correlations, consistently across all emerging markets examined. The positive effect of risk aversion on emerging market comovements is particularly strong for South Africa and Turkey and is consistent with contagion effects. The results underscore the importance of non-cash flow shocks in models of contagion and portfolio risk.

Foreign institutional investors and stock return comovement

We investigate whether foreign institutional investors facilitate firm-specific information flow in the global market. Specifically, using annual institutional ownership data from firms across 40 countries, we find that foreign institutional ownership is negatively associated with excess stock return comovement. Our results are more pronounced when foreign institutional investors originate from common-law countries and hold a large equity stake in invested firms; and when the invested firms are located in civil-law countries. Overall, the evidence suggests that foreign institutional investors from countries with strong investor protection play an important informational role in mitigating excess stock return comovement around the world.

An Evaluation of the Stock Market Co-movement Between Korea and ASEAN Countries

This study examines the stock market co-movement between Korea and ASEAN countries, following the implementation of the Korea-ASEAN Free Trade Agreement (FTA) for 10 years. Based on the analyses on returns coupling between the Korea’s stock market index and six ASEAN countries’ stock market indices, we find that the Korean stock market index has a reciprocal relationship with those of Malaysia, Thailand and the Philippines. However it Granger causes the Vietnam stock index, while it does not Granger cause those of Laos and Cambodia. We also reveal that the shock on the Korea stock market has a positive effect on the stock markets of Malaysia, Thailand, the Philippines and Vietnam for two days based on impulse response function analyses. In addition, the KOSPI is observed to explain more than 20% of Thai, Malaysian and Filipino stock market returns whereas these countries’ index returns describe only less than 4% of the KOSPI’s. Consequently, we conclude that the Korean stock market influences the ASEAN stock markets. In robust tests evaluating whether the co-movement of returns in different stock markets is a popular trend, the ASEAN countries’ stock market returns are more influenced by the KOSPI than by the Nikkei 225 of Japan’s stock market index.

Oil price and automobile stock return co-movement: A wavelet coherence analysis

This paper explores possible co-movement between oil price and automobile stock return in a joint time-frequency domain. Daily price series from August 01, 1996 to June 20, 2017 is used in this analysis. The results indicate that the co-movement between oil price and automobile stock return is strong during November, 2000–December, 2002 and March, 2006–December, 2009. The co-movement is found to be more pronounced in the long-term and stock return is sensitive to the higher oil price emanating from the demand shock. This contravenes the conventional wisdom that crude oil is always counter-cyclical to the automobile stocks. For investor, this weakens the probable gain from including oil asset in a portfolio of automobile stocks as crude oil does not offer cushion against bearish automobile stock markets during the crisis period.

Ambiguities in valuing information technology firms: Do internet searches help?

A presence of accessible information can make investors better informed with improved efficiency in valuation. However, it is not uncommon to observe price anomalies in financial markets, possibly because of investors' attention constraints. In our study, we examine the differences in the value of Internet searches for price discoveries for IT firms when investors encounter difficulties in valuation. Through our cross-sectional analyses, we find a negative association between Internet searches and return comovements and interestingly the association between the two becomes larger as the level of ambiguities stemming from intangible attributes increases. We also show that the degree to which a firm's returns comove is sustained over longer periods when coupled with a shock to intangible attributes than market-wide volatilities. Overall, our study provides deeper insights into the role of Internet searches and their interplay with ambiguities in adjusting valuation bias and the dynamic aspects of return comovements.

Corporate Rivalry and Return Comovement

We examine whether corporate rivals react to industry-specific competition-shocks by increasing product differentiation or, alternatively, by lowering differentiation to capture scale-economies. As rival reactions affect intraindustry cash-flow correlations, these two hypotheses imply differential changes in extra-factor, within-industry stock return comovement. Consistent with the cost-reduction hypothesis, idiosyncratic return comovement increases significantly on average, and more so for industry laggards. Industries where competition-shocks significantly affect return comovement also develop higher cost-efficiency measures. Finally, greater return comovement increases the likelihood that two rival firms will merge and raises subsequent industry average return comovement.

Local clientele: geography and comovement of stock returns

PurposeLocal investors have the ability to impact the stock prices and returns of local firms. However, the impact of news made by a firm on local investors and neighboring companies is absent from the academic literature. The purpose of this paper is to fill that void and examine how a local investor clientele affects the stock market reactions of firms located within the same geographic proximity as a news-generating firm.Design/methodology/approachAfter accounting for firm, industry, and geographic characteristics, this study examines how a firm’s dividend initiation announcement (positive news) influences stock prices of seemingly unrelated firms within the same metropolitan statistical area (MSA).FindingsDividend-paying firms located in areas with a higher percentage of dividend clientele experience a positive comovement reaction when a seemingly unrelated firm within the same MSA announces a dividend initiation. The positive reactions are specifically for dividend-paying firms, while non-dividend payers exhibit no significant response. These results are robust to numerous regression methods and alternative explanations.Practical implicationsThese findings are consistent with the positive-investor-attention hypothesis, suggesting positive spillover effects from news announcements for other local firms in the presence of individual investor clientele.Originality/valueThis is the first study to link how news generated by one firm can influence other geographically local firms, providing evidence on the impact of individual investor clientele on stock returns of local non-news firms.

Analyst Geographic Proximity to Industry Center, Industry Information, and the Efficacy of Analyst Research Output

We propose that an analyst’s distance-to-industry-center (DTIC) can serve as an instrument for industry information. Consistent with this hypothesis, we find that DTIC has a significant negative impact on forecast accuracy. We conduct a series of tests to corroborate the link between DTIC and industry information, which is relevant for within-industry co-movement of firm fundamentals and returns. Finally, we exploit the impact of Chinese import shocks on different industries as exogenous shocks to industry centers to establish a causal link between DTIC and forecast accuracy. Overall, we shed light on how an analyst’s industry information is disseminated into the market.

Global Risk Aversion and International Return Comovements

I establish three stylized facts about global equity and bond return comovements: Equity return correlations are higher, asymmetric, and countercyclical, whereas bond return correlations are lower, symmetric, and weakly procyclical. To interpret these stylized facts, I formulate a dynamic no-arbitrage asset pricing model that consistently prices international equities and bonds; the model features various time-varying global macroeconomic uncertainties and risk aversion of a global investor. I find that different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to the global risk aversion shock can explain the observed comovement differences. Global risk aversion explains 90% (40%) of the fitted global equity (bond) comovement dynamics.

Information leakage, site visits, and crash risk: Evidence from China

This study uses Chinese listed firms during 2009–2014 to examine how conditional skewness (crash risk), the third moment of the return distribution, reacts to the information revealed by site visits. Our results indicate that crash risk increases with site visits. Our findings are robust for multiple measures of crash risk, site visits, firm-fixed effects, endogeneity issues, and different modeling techniques. The effect of site visits on crash risk is stronger for firms with lower disclosure, a high dispersion of investor opinions, in down markets, and at non-SOEs. In addition, we show that site visits provides more firm specific information to the market, reducing their return co-movements with the market. These results indicate that site visits are an important way for market participants to gain information about the firms.

Institutions, economic openness and stock return co-movements: An empirical investigation in emerging markets

•Institutions have positive impacts on stock return co-movement in emerging markets.•Economic openness combined with institutions reduces stock return co-movement.•Market with better institutions offer more opportunities for diversification.

The Real and Nominal Determinants of Stock and Bond Returns Comovement

The comovement between returns to stocks and nominal Treasury bonds varies over time in both magnitude and direction. Earlier research attempts to interpret this phenomenon as a consequence of variations in the link between inflation and future economic activity. I present some opposing empirical evidence, and instead argue that in the data, the comovement between stock and nominal bond returns is driven by real factors. I build a New Keynesian model that generates this behavior through the joint dynamics of output, inflation, and interest rates. The model features two types of persistent shocks to productivity growth: mean-reverting “cyclical” shocks and permanent “trend” shocks. The relative importance of these two shocks varies stochastically over time. The model quantitatively explains the observed patterns in stock-bond return comovement.

Dealing with dealers: Sovereign CDS comovements

Abstract We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS return comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis helps alleviate the endogeneity concerns in our analysis.

Identification of Global and Local Shocks in International Financial Markets via General Dynamic Factor Models*

AbstractWe employ a two-stage general dynamic factor model to analyze co-movements between returns and between volatilities of stocks from the U.S., European, and Japanese financial markets. We find two common shocks driving the dynamics of volatilities—one global shock and one United States–European shock—and four local shocks driving returns, but no global one. Co-movements in returns and volatilities increased considerably in the period 2007–2012 associated with the Great Financial Crisis and the European Sovereign Debt Crisis. We interpret this finding as the sign of a surge, during crises, of interdependencies across markets, as opposed to contagion. Finally, we introduce a new method for structural analysis in general dynamic factor models which is applied to the identification of volatility shocks via natural timing assumptions. The global shock has homogeneous dynamic effects within each individual market but more heterogeneous effects across them, and is useful for predicting aggregate realized volatilities.

News, search and stock co-movement: Investigating information diffusion in the financial market

Abstract With the increase of global economic integration and business connections, stock performance in the securities market display increasing co-movement. Such co-movement is an important vehicle for risk and portfolio management in the finance arena. Thus, it is important for academics and practitioners to understand the mechanisms behind this co-movement. We focus on information diffusion and investigate the relationship between firm co-mentions and return co-movement, as well as the mediating role of search co-attention. By using sentiment analysis techniques, we further divide the firm co-mention relationships into supporting co-mentions and opposing co-mentions. Experiments were conducted based on stock data for 300 companies in the Shanghai-Shenzhen 300 Index, their public information, and Baidu’s search volume data on those companies. Supported by information processing theory and prospect theory, our results indicate that information co-mentions (including supporting co-mentions and opposing co-mentions) has a significant influence on the return co-movement. Search co-attention plays an important mediating role in the relationship between firm co-mentions and return co-movement. More specifically, opposing co-mentions have a greater impact on search co-attention than supporting co-mentions, as well as a greater impact on return co-movement than supporting co-mentions. These findings provide important insights for the theoretical and practical implications.

Excess Stock Return Comovements and the Role of Investor Sentiment

Excess Stock Return Comovements and the Role of Investor Sentiment

Preference for Dividends and Return Comovement

Stocks that initiate dividends tend to co-move more with other dividend paying stocks and co-move less with stocks that are non-dividend payers. These changes in return comovement do not come from variations in firm fundamentals or characteristics. Instead, comovement in stock returns and trading activities are related to investor preference for dividends. Mutual funds that prefer dividends hold more of the dividend initiators and flows to these funds move the prices of dividends payers in tandem. Our findings support a clientele-based explanation for return comovement, which becomes stronger following periods of high dividend sentiment.