The Ungeheuer and Weber (2021) Comove and Stock Returns Effect Disappears with Control for Idiosyncratic Volatility

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