Why Do the Frequencies of Comovement with the Market Predict the Cross-Section of Stock Returns?

34 Pages Posted: 10 Nov 2021

See all articles by Peixin Li

Peixin Li

University of Florida

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: November 8, 2021

Abstract

Ungeheuer and Weber (2021, UW) propose a Comove measure, the fraction of weekly stock returns that are in the same direction as the market, and document that Comove positively predicts cross-sectional stock returns. We show that Comove is strongly negatively correlated with idiosyncratic volatility. Controlling for the idiosyncratic volatility effect renders the Comove effect insignificant, but not vice versa. For example, after controlling for the idiosyncratic volatility effect, the long-short Comove portfolio’s monthly alpha falls to 0.115% (t = 1.55) in the US and 0.014% (t = 0.29) in 23 international markets.

Keywords: Frequency of comovement; idiosyncratic volatility; counting heuristic; international finance

JEL Classification: G11, G12, G15, G41

Suggested Citation

Li, Peixin and Wang, Baolian, Why Do the Frequencies of Comovement with the Market Predict the Cross-Section of Stock Returns? (November 8, 2021). Available at SSRN: https://ssrn.com/abstract=3959247 or http://dx.doi.org/10.2139/ssrn.3959247

Peixin Li

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Baolian Wang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

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

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