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

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