Time-Series and Cross-Sectional Excess Comovement in Stock Indexes
نویسندگان
چکیده
This paper is an empirical investigation of the excess comovement of industry indexes in the U.S. stock market between January 8, 1973 and December 31, 2001. We define excess comovement as the correlation between two assets beyond what can be explained by fundamental factors. In our analysis, the fundamental factors are sector groupings and the three Fama-French factors. We then estimate excess comovement as the mean absolute unconditional correlation of residuals of univariate (OLS) or joint (FGLS) regressions of these fundamentals on industry returns. We show that excess comovement is surprisingly high (a lower bound of 0.138 and an upper bound of 0.263) and represents between 32% and 60% of the average raw absolute correlation. Excess comovement is also uniformly significant across industries and over time and symmetric, i.e., not significantly different in rising or falling markets. We explain approximately 25% of this excess correlation by its positive relation to proxies for information asymmetry, information heterogeneity, and U.S. monetary and real conditions, and its negative relation to the level of the short-term interest rate. This evidence is consistent with the implications of portfolio rebalancing and product market theories of financial contagion, but offers little or no support for the correlated liquidity shock channel. JEL classification: D82; G14; G15
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