Comovement as an Investment Tool

Brad Cornell

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: This paper develops a new tool for discovering mispriced securities based on an analysis of comovement in asses prices. Recent research in finance has demonstrated that comovement can be due to the trading patterns of noise traders as well as underlying economic fundamentals. Because comovement can be measured much more accurately than expected returns, it can be used to identify securities for which the influence of noise traders is high. Those are situations in which mispricing is most likely to exist. Therefore, analysis of comovement can provide important information about potential mispricing.

Date: 2003-09-01
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