Ubiquitous Comovement

65 Pages Posted: 21 May 2019

See all articles by William Grieser

William Grieser

Texas Christian University

Jung Hoon Lee

Tulane University - A.B. Freeman School of Business

Morad Zekhnini

Tulane University

Date Written: May 9, 2019

Abstract

Rational and behavioral asset pricing theories offer conflicting interpretations of the covariance structure of asset returns. Return comovement beyond what prespecified empirical factor models can explain is often interpreted in favor of frictions or behavioral explanations. However, we show that randomly grouped assets exhibit "excess" comovement that is ubiquitous and indistinguishable from the comovement of economically motivated groupings advanced in the literature. Our finding is consistent with the presence of a latent factor that could be derived from multiple sources of systematic variation, including rational sources. We propose new statistical tests that account for latent factors when detecting excess comovement.

Keywords: excess comovement, fundamentals, rational markets, behavioral finance, stock returns, factor models

JEL Classification: G11, G12, G14, G40

Suggested Citation

Grieser, William and Lee, Jung Hoon and Zekhnini, Morad, Ubiquitous Comovement (May 9, 2019). Available at SSRN: https://ssrn.com/abstract=3385841 or http://dx.doi.org/10.2139/ssrn.3385841

William Grieser (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

Jung Hoon Lee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Morad Zekhnini

Tulane University ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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