Style Investing, Comovement and Return Predictability

38 Pages Posted: 28 Aug 2008 Last revised: 10 Apr 2012

See all articles by Sunil Wahal

Sunil Wahal

Arizona State University (ASU) - Finance Department

M. Deniz Yavuz

Purdue University - Krannert School of Management

Date Written: February 1, 2009

Abstract

Barberis and Shleifer (2003) argue that style investing generates (a) comovement between individual assets and their styles, and (b) momentum and reversals in both style and asset returns. These predictions imply that one can use comovement to assess the impact of style investing on asset-level return predictability. We find that high comovement winner (loser) portfolios have significantly higher (lower) future returns than low comovement winner (loser) portfolios. The magnitude of the improvement in three-factor alphas from traditional momentum strategies is both statistically significant and economically important. Long-horizon reversals are also larger for high comovement portfolios. Our results suggest that style investing plays an important role in the predictability of asset returns.

Keywords: comovement, momentum, style investment, behavioral finance, return predictability , reversals

JEL Classification: G11, G12, G00, D81, D84

Suggested Citation

Wahal, Sunil and Yavuz, M. Deniz, Style Investing, Comovement and Return Predictability (February 1, 2009). Available at SSRN: https://ssrn.com/abstract=1259871 or http://dx.doi.org/10.2139/ssrn.1259871

Sunil Wahal

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

M. Deniz Yavuz (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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