Price-Based Return Comovement

Abstract

Similarly priced stocks move together. Stocks that undergo splits experience an increase in comovement with lower priced stocks and a decrease in their comovement with higher priced stocks. Price-based comovement is not explained by economic fundamentals, firm size, or changes in liquidity or information diffusion. The shift in comovement following splits is greater for large stocks, high priced stocks, and when investor sentiment is high. In the full cross-section, price-based portfolios explain variation in stock-level returns after controlling for movements in the market and industry portfolios as well as portfolios based on size, book-tomarket, transaction costs, and return momentum. The results suggest that investors categorize stocks based on price.

Keywords: G14

JEL Classification: Price, Return Comovement