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Connected Stocks
Author(s) -
ANTÓN MIGUEL,
POLK CHRISTOPHER
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12149
Subject(s) - mutual fund , hedge fund , stock (firearms) , closed end fund , index fund , open end fund , returns based style analysis , business , excess return , financial economics , index (typography) , monetary economics , trading strategy , economics , econometrics , finance , institutional investor , market liquidity , computer science , corporate governance , context (archaeology) , world wide web , mechanical engineering , paleontology , engineering , biology
ABSTRACT We connect stocks through their common active mutual fund owners. We show that the degree of shared ownership forecasts cross‐sectional variation in return correlation, controlling for exposure to systematic return factors, style and sector similarity, and many other pair characteristics. We argue that shared ownership causes this excess comovement based on evidence from a natural experiment—the 2003 mutual fund trading scandal. These results motivate a novel cross‐stock‐reversal trading strategy exploiting information contained in ownership connections. We show that long‐short hedge fund index returns covary negatively with this strategy, suggesting these funds may exacerbate this excess comovement.