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Connected stocks

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  • Miguel Anton
  • Christopher Polk
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    Abstract

    By connecting stocks through common active mutual fund ownership, we forecast cross-sectional variation in return covariance, controlling for similarity in style (in- dustry, size, value, and momentum), the extent of common analyst coverage, and other pair characteristics. We argue this covariance is due to contagion based on re- turn decomposition evidence, cross-sectional heterogeneity in the extent of the e¤ect, and the magnitude of average abnormal returns to a cross-stock reversal trading strat- egy exploiting information in these connections. We show that the typical long/short hedge fund covaries negatively with this strategy suggesting that hedge funds may potentially exacerbate the price dislocation we document.

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    File URL: http://eprints.lse.ac.uk/43098/
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    Bibliographic Info

    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 43098.

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    Length: 53 pages
    Date of creation: May 2010
    Date of revision:
    Handle: RePEc:ehl:lserod:43098

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    Cited by:
    1. Johnny Kang & Tapio Pekkala & Christopher Polk & Ruy Ribeiro, 2011. "Stock prices under pressure: how tax and interest rates drive returns at the turn of the tax year," LSE Research Online Documents on Economics 43096, London School of Economics and Political Science, LSE Library.

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