Trading Patterns and Excess Comovement of Stock Returns

Posted: 28 Sep 2007

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Abstract

In April 2000, 30 stocks were replaced in the Nikkei 225 Index. The unusually broad index redefinition allowed for a study of the effects of index-linked trading on the excess comovement of stock returns. A large increase occurred in the correlation of trading volume of stocks added to the index with the volume of stocks that remained in the index, and opposite results occurred for the deletions. Daily index return betas of the additions rose by an average of 0.45; index return betas of the deleted stocks fell by an average of 0.63. Theoretical predictions for changes in autocorrelations and cross-serial correlations of returns of index additions and deletions were confirmed. The results are consistent with the idea that trading patterns are associated with short-run excess comovement of stock returns.

Keywords: Equity Investments, Fundamental Analysis and Valuation Models, Portfolio Management, Equity Strategies, Asset Allocation, Trading and Execution, Portfolio Construction, Rebalancing, and Implementation, Investment Theory, Behavioral Finance, Efficient Market Theory, Risk Measurement and Management

JEL Classification: G10, G20

Suggested Citation

Sosner, Nathan and Greenwood, Robin M., Trading Patterns and Excess Comovement of Stock Returns. Financial Analysts Journal, Vol. 63, No. 5, 2007. Available at SSRN: https://ssrn.com/abstract=1017330

Nathan Sosner

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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