Biased Assessment of Comovement

54 Pages Posted: 15 Aug 2018 Last revised: 16 Aug 2021

Date Written: August 15, 2021

Abstract

I document a systematic bias in the assessment of comovement: individuals assess a moderate relationship between two variables regardless of the actual strength of the relationship between them. In a survey of finance professionals, participant-assessed betas of different financial and macroeconomic variables with the market are approximately 0.5 regardless of the actual historical betas. In an empirical setting, electricity futures exhibit moderate comovement with gas futures despite persistent heterogeneity in their relationship in the spot market. Trading against this bias generates annualized excess returns of 7.3 percent and a Sharpe ratio of 1.14.

Keywords: Asset Pricing, Belief Formation, Comovement

JEL Classification: G02, G12

Suggested Citation

Matthies, Ben, Biased Assessment of Comovement (August 15, 2021). Available at SSRN: https://ssrn.com/abstract=3223227 or http://dx.doi.org/10.2139/ssrn.3223227

Ben Matthies (Contact Author)

University of Notre Dame ( email )

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