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Connected Stocks

  • Miguel Anton,

    ()

  • Christopher Polk

    ()

By connecting stocks through common active mutual fund ownership, we forecast cross-sectional variation in return covariance, controlling for similarity in style (industry, size, value, and momentum), the extent of common analyst coverage, andother pair characteristics. We argue this covariance is due to contagion based on re- turn decompostion evidence, cross-sectional heterogeneity in the extent of the e¤ect,and the magnitude of average abnormal returns to a cross-stock reversal trading strategy 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://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP651_2010_ConnectedStocks.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp651.

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Date of creation: Mar 2010
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Handle: RePEc:fmg:fmgdps:dp651
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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