Does Common Analyst Coverage Explain Excess Comovement?
Ryan D. Israelsen
Indiana University Bloomington - Department of Finance
June 6, 2013
AFA 2012 Chicago Meetings Paper
This paper shows that a largely-ignored source of commonality - correlated errors in news about fundamentals - is an important, rational determinant of excess comovement. Individual analysts' forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement - controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around (1) brokerage firm mergers and (2) additions to an index lead to changes in excess comovement. This information channel can explain 10% to 25% of the increase in comovement around additions to the S&P500 index.
Number of Pages in PDF File: 52
Keywords: Analyst Coverage, Comovement, Excess Comovement, Information, Learning, S&P500, Social Networks, Stock Returns, Earnings Forecasts, Earnings, Forecasts, Correlation, Style Investors
JEL Classification: D83, G12, G14, G24working papers series
Date posted: April 4, 2010 ; Last revised: June 6, 2013
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