Style popularity and the comovement of stocks

T. Wouters and Auke Plantinga

No 06E08, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: We examine to what extent the popularity of an investment style can be attributed to style investing. The style investing hypothesis predicts that assets in the same style show strong comovement with respect to their underlying fundamentals and that reclassifying assets into a new style raises its correlation with that style. We test this prediction by studying how comovement varies with proxies of popularity. We use different kinds of data, such as data on stocks, mutual funds, IPO?s and financial analysts. We provide strong evidence that when popularity of a style is high investors base their demand for stocks on an individual stock level. We also find that style popularity is positively related to style performance. The evidence presented here challenges the view that investors base their asset allocation on a style level instead of an individual stock level.

Date: 2006
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