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Connected stocks

Listed author(s):
  • Miguel Anton
  • Christopher Polk
Registered author(s):

    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/
    File Function: Open access version.
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    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
    Handle: RePEc:ehl:lserod:43098
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    LSE Library Portugal Street London, WC2A 2HD, U.K.

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    Web page: http://www.lse.ac.uk/

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    1. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
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    12. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    13. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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    16. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
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    28. repec:hrv:faseco:30747193 is not listed on IDEAS
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