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Qualitative Similarity and Stock Price Comovement

66 Pages Posted: 4 Sep 2012 Last revised: 8 Aug 2017

Travis Box

University of Mississippi - Department of Finance

Date Written: July 28, 2017

Abstract

I introduce a method for gauging the qualitative similarity of firm-specific information based on linguistic commonality in newswire text. I show that this new qualitative similarity measure predicts future cross-firm return correlation even after accounting for the pair’s contemporaneous price comovement, common exposures to systematic risk, firm liquidity, price, index membership, text volume, headquarters location, product similarity, shared mutual fund or institutional ownership, common analyst following and newswire co-mentions. I also demonstrate that content produced solely by journalists cannot predict an economically meaningful portion of future comovement. Out-of-sample tests confirm that knowledge of qualitative similarity can also reduce portfolio risk.

Keywords: Comovement, Dynamic Panel Estimation, Textual Analysis, Correlation

JEL Classification: C33, C53, D83, G00, G11, G12, G14

Suggested Citation

Box, Travis, Qualitative Similarity and Stock Price Comovement (July 28, 2017). Available at SSRN: https://ssrn.com/abstract=2139708 or http://dx.doi.org/10.2139/ssrn.2139708

Travis Box (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

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