Style Investing, Comovement and Return Predictability
38 Pages Posted: 28 Aug 2008 Last revised: 10 Apr 2012
Date Written: February 1, 2009
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
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