Local Demand Shocks, Excess Comovement and Return Predictability

66 Pages Posted: 2 Mar 2013 Last revised: 26 Sep 2018

See all articles by Markus S. Broman

Markus S. Broman

Syracuse University - Whitman School of Management

Date Written: September 20, 2018

Abstract

I investigate the importance of local demand shocks on excess comovements and return predictability for 4560 twin-pairs of Exchange-Traded Funds (ETFs) from 15 country-pairs. The returns on ETFs traded in the same country comove excessively with one another. These comovements are stronger for funds with greater liquidity and more competitors in the local market. In contrast, comovements are not materially different among ETFs that are attractive to fundamental (factor) investors. A local measure of mispricing, based on price-deviations between ETFs and their foreign peers, strongly predicts return reversals not only for ETFs, but also for the local stock market. Betting against local mispricing yields significant abnormal returns of up to 25 percent per year after trading costs.

Keywords: Preferred Habitat; Correlated Demand; Mispricing; Arbitrage; Comovement; Return Predictability.

JEL Classification: G12, G14, G15, G23

Suggested Citation

Broman, Markus S., Local Demand Shocks, Excess Comovement and Return Predictability (September 20, 2018). Available at SSRN: https://ssrn.com/abstract=2227004 or http://dx.doi.org/10.2139/ssrn.2227004

Markus S. Broman (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.markusbroman.com

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