Comovement, Passive Investing and Price Informativeness

53 Pages Posted: 24 Oct 2012 Last revised: 8 Sep 2015

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

Dan W. French

Lamar University; University of Missouri at Columbia

Maria G. Vivero

The University of Dayton

Date Written: July 23, 2015

Abstract

From 1992 to 2011, average R2 increased from 0.17 to 0.47. During this period, passive financial institutions also grew their ownership from 30 to 50% of the market. Passive investors do not perform fundamental research nor trade around firm-specific news, thus reducing the firm-specific component of total volatility. As a result, prices comove more strongly with each other and reveal less information. Consistent with this conjecture, we find that comovement’s rise since the early 1990s is largely driven by the growth in passive institutional ownership as prices of stocks predominantly owned by passive institutions contain less information about future earnings.

Keywords: comovement, volatility, informed trading, correlated trading, passive investing, institutional ownership, price informativeness

JEL Classification: G10, G12, G14, G15, G18

Suggested Citation

DeLisle, Jared and French, Dan W. and Vivero, Maria Gabriela, Comovement, Passive Investing and Price Informativeness (July 23, 2015). Available at SSRN: https://ssrn.com/abstract=2166118 or http://dx.doi.org/10.2139/ssrn.2166118

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Dan W. French

Lamar University ( email )

PO Box 10745
Beaumont, TX 77710
United States
409-880-8603 (Phone)

University of Missouri at Columbia ( email )

Columbia, MO Columbia 65211
United States

Maria Gabriela Vivero (Contact Author)

The University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States
937-229-3458 (Phone)

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